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Despite a gloomy emergency budget, investors urged to control what they can by taking practical steps to protect their finances during an economic downturn.

1 July 2020:  Last week, Finance Minister Tito Mboweni painted a bleak picture, indicating that South Africans will be facing a deep recession. Despite this, the minister offered some hope, saying that if — as a nation — we take the proverbial narrow gate and make hard choices and certain sacrifices, it is in our control to turn things around.


Mboweni also said: “like any wise farmer will tell you, when the tempest is raging, you must protect your plants from damage”. According to Elize Botha, Managing Director of Old Mutual Unit Trusts, “while the situation is indeed tough and many households are understandably feeling the financial pressure, there remains opportunity for investors to make small, but smart money moves today to decrease the potential impact of a (further) downturn on their household tomorrow.”


Botha explains that a recession is when the economy shrinks in size for two consecutive periods of three months each.  “According to Minister Mboweni, the South African economy is now expected to contract by 7.2 per cent in 2020. This is the largest contraction in nearly 90 years. 


“The COVID-19 pandemic will most likely result in a deeper market downturn, which could result in more companies filing for insolvency, resulting in even more job losses. With fewer consumers spending money, the profitability of several companies will result in many not being able to perform and some listed companies may not be able to pay dividends in the short term,” says Botha. 


In this current climate, its is not easy to remember that the economy is cyclical and will rebound, but it is important to hold on to this glimmer of hope, says Botha. Rather than succumbing to anxiety or becoming despondent over the immediate state of things, investors should stay positive.


“We shouldn’t overlook our country’s economic strengths, particularly at this time. I agree with the Minister when he says that we enjoy a diverse industrial base, a flexible exchange rate and stable inflation thanks to the great work by the South African Reserve Bank,” says Botha.


She says that investors need to take the opportunity created by COVID-19 to address ‘financial weak spots’ that could undermine any gains towards their financial goals.


Botha offers the following roadmap to help investors mitigate the impact of a recession on their financial aspirations. 

  1. Pay off your debt ASAP

Minister Mboweni pointed out that debt is South Africa’s greatest weakness. In 2019 the Debt Counselling Association reported that 10 million South Africans have ‘bad debt’, having missed three or more monthly payments. What’s more, those with bad debt typically spend an average of over 60% of their after-tax income on repayments. “Whatever the state of the market, you should remain committed to paying off high-interest debt — such as your credit and store cards — as soon as possible”, advises Botha.


  1. Trim your expenses, lockdown style

Mboweni said that the State would try to reduce expenditure, noting candidly that “today we [South Africa] are not as rich as we were 10 years ago”.


We need to all take a cold, hard look at our lifestyles and find inventive ways to trim expenses. For many people, the lockdown has helped identify the things they can live without. Granted, for many this is now a matter of necessity rather than luxury; it is still an excellent opportunity to look at the areas where spending has crept up beyond what is necessary and reset.


  1. Stay invested

Almost ironically, time out the market can pose a higher risk to your investment goals than bad market volatility. Investors should avoid withdrawing their investments from the markets out of fear of losing money, as doing this could mean they miss out on great investment returns and solidify losses.


According to research by Old Mutual Investment Group, had an investor over cautiously  withdrawn their money from the stock market 20 years ago, and subsequently missed the 10 best performing days of the JSE (Johannesburg Stock Exchange), their investment would have lost out on potential growth of 44% than if they had remained invested over the entire period.


  1. Start your emergency fund now

The middle of a global economic crisis might not seem like the right time to think about future financial challenges one may face, but there is in fact no better time. If there is anything that COVID-19 has taught us it is the importance of being in sound financial health and having reserves for when crisis hits. No-one likes to think about all the things that can go wrong in life, but you have to make sure you are financially prepared for emergencies.


If you don’t have an emergency fund in place, use the savings from the interest rate cuts this year to kick-start a nest egg earmarked for unexpected expenses, such as medical costs or unforeseen expenses, or loss of income.


Source: Magna Carta
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