24 Nov Tough times in 2020: What not to cut back on
Has the Covid-19 pandemic been an opportunity? Without doubt – nobody wanted a global pandemic, but in some way, being forced into lockdown forced us to think differently. We often defer so many things we know we should be doing but simply put off for another day. Lockdown may have provided the opportunity for you to take stock of what is important and what is not. And for many, this includes what not to cut back on.
As global economies reduced to essential services, most of us felt the pinch in our pockets. Although many people spent less as the economy was practically closed, the vast majority of people earned less income too. South Africa was no exception with poor economic growth before lockdown.
The hard lockdown for many of us brought that moment of realisation: what now, where can I cut costs?
The best starting point for cutting costs is to do a budget. This is textbook managing-your-finances-101 and will establish where you spend your money. Then prioritise these expenses: consider if the expense is essential, income-generating or a luxury you can do without. Also consider what the short-/long-term impact of cutting the expense could be. And, most importantly, understand what not to cut back on.
What not to cut back on?
Don’t cancel your contract or stop paying the premiums (causing the contract to lapse). Rather review your risk benefits to establish if you are appropriately insured. Cancelling the contract or leaving it to lapse could result in a far greater financial impact. Applying for a new insurance contract in the future could mean higher premiums or excluded benefits due to age or deterioration in your health.
For those with personal insurance contracts and insurance provided by your company group scheme, there may be some overlapping benefits. If you have both, check if there is a continuation option on your group scheme benefits. This option will allow you to continue with the group benefit in your personal capacity should you leave your employer. The continuation option does not need full underwriting – usually only an HIV test. While employed and on the group scheme your monthly insurance costs are usually much lower than your personal insurance as the cost is spread out across the entire company. If you have both group and personal risk benefits with a continuation option and find you are over-insured or with overlapping benefits, you could reduce your personal insurance.
For the obvious reason that there is potentially a higher probability of needing medical aid during a pandemic, it would not be wise to cut this expense out completely. As with your insurance, rather review your medical plan for appropriateness. It is always possible to downgrade to a more cost-effective plan at any point in the year if you are not using all the benefits of the plan optimally.
Often the biggest monthly expense is our bond repayments – the debt that keeps you awake at night. Instead of missing a payment, rather contact your bond provider to find out if there are any relief options available. Missing debt repayments can affect your credit-risk rating, or even worse, the bank repossessing the asset.
Saving for retirement
Monthly contributions towards investments would seem the obvious first choice to cut costs. You may want to stop saving for a while to increase monthly cash flow. However, you should fully understand the nature of the product before terminating the contribution. There are many old-style investment products still on the market with maturity dates and penalties if those maturity dates are not met. Terminating the contribution could result in a hefty penalty. Other investment products offer tax-saving benefits that help reduce your income tax leading to a greater financial benefit. Some investment products have ancillary risk benefits that will lapse if contributions are stopped. Consider these products with ancillary risk benefits together with your other insurance benefits.
If you need to stop contributing towards investments, start with the most flexible products – without penalties, ancillary or tax-saving benefits.
The great realisation: what you can cut back on
Perhaps the greatness of lockdown was the realisation many of us had: it is possible to live differently. And so, we were forced to adapt. Our day-to-day environment had changed, work was different and so became our spending. We didn’t buy that cup of coffee every day on our way to work. We prepared more meals with fresh ingredients instead of eating at restaurants or buying take-aways. Wasteful expenditure reduced and it was easier to not spend compulsively on things we didn’t actually need.
What we need to take from this realisation is that when things return to some normality, do we need to revert to our wasteful ways? Do we really have to buy that cup of coffee each day? Are we really making use of that gym contract? Do we actually watch DStv? Ask yourself these questions and then see if you have adapted to do things differently.
Easy costs to cut
Shopping online is another great way to save time and money. As well as, hopefully, less compulsive buying! If you are working from home and travelling less give your car insurance company a call to negotiate your monthly premium.
Even if you were one of the fortunate ones to keep your head above water, don’t you want to waste less? Rather channel that bit of extra cash to secure a brighter future.
Matthew Erskine CFP® is a financial planner at Netto Invest.