How To Protect Your Income-generating Ability When Times Get Tough

PICTURE: The Citizen

The best way to navigate the current uncertain economic conditions is to ensure a goals-based financial plan protects income-generation over the long term, says Standard Bank.

Sound money and risk management is more critical than ever now, with risk events like another potential ratings downgrade on the rise. Risky events that could delay dreams include retrenchment, a sudden medical bill or a death in the family.

“Every South African needs adequate financial planning and coverage to avoid unexpected events ruining their long-term goals. This is why a secure income stream to match future needs is so important and forms a crucial component of a good financial plan,” says Felix Kagura, Head of Long-Term Insurance Propositions at Standard Bank.

Long-term savings goals can take a few years to reach – usually periods of more than 60 months, and the benefit of this is that investors earn more interest than they would on short-term saving goals. However, the longer the investment period, the more important it is to insure against risks that may interrupt these saving goals.   

“Saving towards items like a house, car, education for children and retirement should not be stopped when a sudden unexpected event happens. Setting long-term savings goals and saving towards them should be everyone’s number one priority,” says Mr Kagura.

“The reality is we are all faced with financial challenges when we least expect them. This is why planning for risky events as well as goals is so important, as a good financial plan will still enable you to meet your goals,” says Mr Kagura.

With economic conditions as tough as they are, it is even harder for people to reach their goals in the timeframes they desired if they do not review and update their plans regularly.

South Africa has, in fact, experienced eight economic recessions since 1961, the longest occurring in 1991–1992. The Medium-Term Budget Policy Statement on October 25 paints an equally dim picture – Treasury revised South Africa’s economic growth downwards from the 1.3 per cent predicted in February Budget to just 0.7 per cent for 2017. Growth is subsequently expected to increase slowly reaching 1.9 per cent in 2020.  

The prospects of another ratings downgrade loom large following the Budget, raising the bar for investors and savers to do more.

“The risk of retrenchments rises when economic conditions are dire, which again highlights the importance of saving for a rainy day via a long-term plan. The importance of managing money and risk cannot be over-emphasized in current circumstances,” says Mr Kagura.

Saving for long-term goals, however, requires discipline and sometimes, sacrifice.

“But it will be worth it in the long run when you are able to move into your own house, drive your own car and pay for your kids’ education and your retirement. At the same time your strategy would have relieved you of the burden of worrying about unexpected expenses,” says Mr Kagura.

Goals-based investing and financial planning need not be complex, but a new approach is needed to protect financial futures when times get tough. Goals-based planning is the solution as it is linked to what someone wants to achieve with their income and savings in the future.

As conditions change, the plan must be flexible enough to adapt in tandem. Solutions could range from adequate life cover to critical illness and disability coverage, to education policies and the like. But this will entail a change in the behaviour of savers too.

“Investment strategies need to internalise the greatest risk when you’re saving for retirement – not having enough income when something unexpected happens to upset those plans. This is why adequate coverage to protect against the risk of an event like retrenchment is linked to any astute financial plan in current conditions,” concludes Mr Kagura.