It will be a very tough festive season this year as many households are struggling through the financial impact of the pandemic.

The ideal plan is to get through to the end of January without going further into debt.

With only three paydays to go before the end of the year time is running out to get a mini plan in place to cope with the financial demands of the festive season. Typically, many of us spend far too much over the period and then take most of the new year to repair the financial damage.

It follows that prevention is better than cure. So why not do something different this time around.

Create a mini-budget – Calculate what you can afford to spend without going further into debt. The total of your expected income for the next three months less your normal living expenses for the period is the amount you can target for the festive season.

Set aside the savings from each pay day into your credit card or access bond so that the money is freely available when you need it.

Get creative with your spend – Spend on gifts that are meaningful rather than expensive. For example, a mall shopping voucher is very practical as you offer a wide variety of options from the various stores in the mall. Furthermore, most stores go on sale after the 25th of December, so your voucher will go a much longer way. Don’t forget the loyalty card/s which may have accumulated some value worthwhile using.

Keep January firmly in mind – Many of us are paid early in December which means that you will need to stretch yourself for a longer period until the January payday. You will need to make sure that you cover debit orders, and all the “must-have” expenses for January.

You will be a super star if you manage to stay away from extra debt by the time you receive your January pay slip. Furthermore, you will start 2021 on the front foot.

The Economic Recovery Plan (ERP) presented this week by our President didn’t land at all with South Africans as, quite frankly, it missed the fundamental basics of sound financial planning.

Financial planning is a process of measuring where you are now relative to where you would like to be somewhere in the future and implementing the necessary steps to get you there.

The ERP lacked in credible, realistic details on how the important areas to recovery would be implemented. Such as the commitment to a sufficient, secure and reliable energy supply within two years?

Peace of Mind – The main outcome of a successful financial plan is peace of mind that you are able to maintain or improve your lifestyle into the future having provisions in place for life changing events.

The  ERP left the nation with very little peace of mind that the leadership has the way forward under control. Again, without details on how jobs are going to be created, how businesses will be saved, how debt will be curtailed.

Proactive not Reactive – A sound financial plan anticipates life changing events and proactively puts provisions in place to cater for them.

The ERP plan is a reactive plan dealing with our devastated economy which we were heading for before the pandemic and COVID19 accelerated it. The warning signs with rating agency downgrades were there long ago. If they were dealt with at the time with urgency and conviction we would not be anywhere near the devastation we have landed in.

 

 

Cut the cloth – Setting up a sound financial plan begins with the personal balance sheet where areas are identified to cut expenses. The main target area is debt reduction through cutting expenses and allocating the new found savings into future investments.                                                                                                                                                                                                   

The ERP bypasses the elephants in the room such as failed SOE’s which are huge liabilities on SA’s balance sheet. The billions poured into these entities could be diverted to many other feasible projects creating investment into our future. Proposals to raise a solidarity tax on an already over taxed country typifies the lack of will to restructure South Africa’s economy.

People first – A sound financial plan is around people and their wants and needs aiming for hopes, dreams and aspirations.

The ERP is flawed as it places government at the heart of economic recovery  instead of reserving that space for the private sector. It is nothing more than a plan to salvage the damage done through incompetency and corruption.

Relevant with the times – Financial Planning moves with the times embracing change to keep the plan relevant. Technology can be  extended to boldly restructure our economy improving efficiencies and standards in areas such as education and health.

It takes courage to change and do something really different which wasn’t found in the ERP.

The short-term solution in the current environment

As our economy is in a deep recession, investment options are very challenging. A useful place to invest in the short term is the money market. Money Market Accounts can be opened at all financial institutions such as your local bank. You can also invest in a money market fund which is a combination of money market accounts with various banks.

It is very difficult at the moment to get a return of around 5% with an extremely low risk of losing your capital. I say low risk because there is a very low possibility that money market funds may be exposed to debt instruments which carry the risk of default. This could in turn lead to a capital loss.

What is it all about?   A money market account trades in bank instruments called “paper”, such as Treasury bills, Banker’s acceptances, certificates of deposit, and bills of exchange which all trade in a period of less than a year.
The money market trades at the so-called ‘interbank’ level where banks lend and borrow to each other. These wholesale rates are higher than the retail rates offered by banks on their savings accounts.

Don’t be lulled into higher yields   If the fund is offering exceptionally high yields it may be riskier than you think. The fund may be invested in low-grade debt (bonds) which often pay a higher return for the risk. The economy is on its knees and corporate debt poses a risk as companies struggle to get back up on their feet.                                

Interpret the rate correctly   The nominal rate is the actual rate of return – normally annual. The effective rate is the rate achieved by reinvesting the interest received and compounding it back into the investment.

Example:
A nominal rate of 7% per annum yields an effective rate of 8.25% over a 5-year period.
If you draw out the interest then you do not get the effective rate. You actually get the nominal rate.
The real rate is the adjusted rate received after subtracting the inflation rate.

These are extraordinary times    In an environment where cash is king, money market accounts are very useful parking bays but be very aware of the possibility of capital loss in the event of the debt exposure defaulting.