What would you do differently?
With millions of people stuck at home, some working, many not, it may sound like an odd time to start looking for the positives before we get back to some semblance of a normal routine. The enforced change in our routines for weeks at a time should have instilled some new positive habits. More Family time, less time wasted in meetings, less time commuting, less money frittered on entertainment, better appreciation of those less fortunate, doing things that are awkward, inconvenient or uncomfortable to protect others. We’re probably going to have to live with this virus for months, maybe years into the future, and if the examples of some of the early countries to manage this pandemic like South Korea, Hong Kong or Singapore, we could well go up and down the various lock-down levels.
What would you do differently? If you knew back at the end of March that these lockdowns could be indefinite, what would you do differently? There is the obvious in terms of stockpiling ‘non-essential’ stuff to the more practical like improved working space, better internet connection, home gym etc.
Health and Medical aid: Although many of us may be thankful that we have a medical aid that would allow us to get into a private hospital at any time during this crisis, I am concerned that, a little bit down the line, especially if there is a surge in cases that threatens to overwhelm our government hospitals, that the government will take the opportunity to push the NHI agenda. They have come to an agreement on a cost per patient to treat Covid patients (R16,000 per day) I have written a long blog on the pros and cons of this, and the extortionate cost to the taxpayer, but that was before the crisis and now the Treasury’s coffers are already running on empty due to the hard lockdown and additional social support. The effective ‘flushing’ of 2 months (and counting) of Sin tax and VAT on Tobacco and Alcohol was a solid shot in both feet, to the tune of at least R2.5bn, so far. That alone would have bought a ton of PPE, hospital beds (156,000 days in private hospitals) and ventilators. This is just the beginning though, corporate tax is going to be way down, especially for companies who could not operate and yet still paid staff, rent etc. They may have taken loans out to do that, and interest on those loans are deductible from tax – and that’s before we consider the tanking of demand for products and services. Personal tax will be impacted to a lesser extent right now, but as the retrenchments come in, that is going to come down too. Salary increases, bonuses etc will be impacted for months, if not years into the future. VAT will be down but will start to pick up as the Fashion and Fun Police’s insane prohibition lists are dropped, but consumer spending is likely to be muted for some time to come. Sensible consumers are going to build up their savings in case their company closes because of infections, or we go back to level 4 or 5 lockdown. Hong Kong has gone in and out of severe lockdown several times in the last 2 months, so there is a precedent for this. The government is going to eye not only the billions paid in premiums into medical aids but the huge cash reserves at the medical aids too (around R40bn) – built over deades with your premiums. Right now, Medical Aid and Gap cover are still a good way to mitigate the health risk, closely followed by Good Dread Disease/ “Life” cover. If NHI comes into effect this dread disease cover is going to be even more important because it will give you the liquidity to seek treatment outside the country. There is increasing evidence that if you get this Covid-19 severely, there are lingering and potential long-term side effects that they are only starting to understand. If you have been postponing taking out any kind of life cover, understand that exposure to this virus could affect your future insurability and look at it now. We’ve all be following the news, we know that co-morbidities like obesity, diabetes, hypertension are significantly contribution to the seriousness of this disease. Some of these can be controlled by lifestyle changes so this might be the time to make those changes (like I am), a Dietician is a good first stop.
Cash Flow: From companies to individuals it is those that have had a cash buffer that have come through this crisis in better shape. I know you’ve heard it a million times from me and other financial advisors, but an emergency fund is crucial. At the absolute least, it should be 3 months of household expenses, but 6 months is a far better buffer. The good news is that the drop in interest rates should have improved your cashflow somewhat (assuming you are still being paid) and my advice is to first kill high interest debt (credit cards not paid in full by the due date and personal loans). If you find it hard to focus on one debt at a time, then build your emergency fund at the same time. Sure, it makes more sense to pay off high interest debt first, but you need to understand your own ‘financial behaviour’. You don’t have to broadcast it, just acknowledge it. Your first step before defaulting on any of your debt (and damaging your credit score) is to speak to the financial institutions and insurance companies for some ‘accommodation’. You may be able to just pay the interest on debt, for example. Before accepting any of the ‘relief’ offered by Life Insurance companies, please read the small print and discuss with an independent financial advisor (you want an independent view, not vested interest). If you are drowning in debt and starting to default, Debt Review is by far the best option. This falls short of declaring bankruptcy which can affect your credit rating for a decade but be aware that any debt you place into debt review will probably blacklist you with that specific institution – not everyone because the history is supposedly deleted after the debt has been cleared. Avoid putting your bond and any long-term debt into debt review because once in there, it is difficult to get it out until it is ‘cleared’.
Career choices: If your career/business has got badly squeezed in the crisis and this has severely impacted your income, take the time to really re-think your current career/income earning choices. It is never too late and you’re never too old to make a career change. I recommend you have a thorough brainstorm on what other ways you could be earning income. It might be a good idea to research brainstorming a bit first, but in short – just make a list without judgement or censure – there is plenty of time for that later. When you have exhausted everything that comes to mind, then start crossing things off the list that are clearly unsuitable or do not appeal to you. There is absolutely no point in following a career path that you think might earn you plenty of money, knowing that you’re going to detest every minute. Don’t take something off the list just because you’re going to need to upskill, get another qualification etc. It is easier today than at any time in our history to access what ever skills you need to get started on a new career. Be sure to pick a new career or side gig that has future potential, isn’t going to be taken over by AI or DIY (real estate for example) and is going to be ‘disaster proof’. This health crisis is about as dire as it gets when it comes to a career catastrophe, so look at the things that have kept going or even thrived. Anything to do with internet or telecoms have done okay, so have most jobs that can run from home – admin, accounting, HR, marketing, finance, investment etc. Some sectors have adapted very quickly to online – education for example. This isn’t going to help though if the company goes bankrupt or must retrench workers. Retail has been hammered – unless it’s online – but again, some diversity is important. Ignore the wobble in the liquor and cigarette sector – that is a South African anomaly, and if there is another crisis, hopefully these errors won’t be repeated. Local Logistics were hurt early on as the number of products that needed to be moved was reduced to those deemed ‘essential’ , but it has become even more important than before. Services are probably some of the hardest hit, and in many cases, they will never open their doors again. If you want to go into online retail, make sure you have a range of products and at least some of them would be considered ‘essential’. Tourism, restaurants and hospitality are going to be decimated when they finally return. Even without the health crisis, this sector is inclined to be cyclical and usually take a dive when the economy slows. AirBnB, Uber and other popular and low entry cost Gigs have lost their lustre. Ideally, keep going through your list and get your list down to 3 potential careers/businesses and investigate them further – do a full personal and business plan to see if it is viable for jumping in or investing capital. Don’t give up your day job, if you haven’t got the stamina to start this in your spare time, you’re not likely to have the long-term resilience to keep this going. The one biggest take-away from this is the power of diversification – try and have several income sources from different sectors. As a short cut, have a look at jobs deemed ‘essential’ from Level 5.
Habits: In my opinion, stating that a new habit can be solidified in 21 days is overly simplistic, but certainly the longer you do something, the easier it gets to adopt a new habit. I am not going to be the Fun Police here, we have all had that in huge chunks over the lockdown and are over it, but there may be useful habits that you can start to put in place that will help you the next time this sort of catastrophe comes round. Make friends with your bank statements. Back in the good old days we could just stuff the envelope from the bank in a drawer and forget about it, today it’s even easier, we can file it in our email, or even delete it. I know it might give you a knot in the stomach every time you think of having a good hard look at your statements, but it does get better with time. I look at mine every morning and have caught more than one dodgy debit and got it reversed the same day. If you look at your accounts every day, you soon pick up your poor spending habits – and the quickest way to stop repeating the behaviour is to see the consequences of your actions in your face every morning. Lifestyle changes to reduce your risk from ‘co-morbidities’ which put you at high risk of not surviving this virus, like obesity, high blood pressure, diabetes etc. can also be developed over time. If you’ve been forced to cut back on alcohol or cigarettes over the lockdown then some good can come of it if you persist with the new habit – rather than go back to your old habit in a fit of pique at the unfairness and insanity of the prohibition in the first place. Routine is a habit that will make working from home much easier and more productive.
Diversifying your investments: Again, I probably sound like a stuck record, but if you have ‘asset concentration’ (too many eggs in too few baskets) in your wealth portfolio you are more likely to be impacted. If you have a rental portfolio – you can get stuck with tenants that cannot pay, maybe for months and you have no legal course. If you rely on dividends, then your income is going to be impacted when that tap switches off because companies just aren’t profitable – this is already happening. The 250 basis point (2.5%) drop in interest rates – a 30% drop from previous levels – will impact all fix income portions of portfolios, and specifically will impact retirees disproportionately. Corporate bonds, which have been the backbone of many investments in the last couple of years, are linked to the interest rate via JIBAR (Johannesburg Inter Bank Average Rate) but Government bonds aren’t. Govt bonds are a reflection of the perceived ‘risk’ of the government defaulting on the debt, which is quite high by international standards. Individuals can invest in these via the Retail Bonds. The stock exchanges have recovered somewhat, so your ‘paper wealth’ is probably looking less bleak than it was a few weeks ago, so it is a good time, psychologically, to do some rebalancing and position your portfolio for a very different ‘new normal’.