John Lennon famously sang: “Life is what happens to you while you’re busy making other plans.”
The Covid-19 coronavirus pandemic is a health crisis, but it is not the only crisis we will experience in our personal lives. What we can do is learn from it and start finding ways to make sure we are better prepared for the next crisis.
I would like to share with you my personal story of surviving a financial crisis. It was this personal crisis 15 years ago that led me to change the way I managed my finances, and put me in a far better position to manage future financial disasters.
Just after the birth of our second child, my husband and I had decided, irrationally, that it was time to buy a bigger house for the bigger family, and with a bigger mortgage. Within a few months of moving into the cash-guzzling house, life threw us a curveball.
We both lost our jobs within months of each other. It was financial Armageddon.
My husband was fortunate enough to find a new job within a few months, but at a lower salary. I started my own freelance business, which took a while to generate an income.
Despite the lower income we were earning, we didn’t make any changes to our lifestyle and, before we knew it, we had amassed sizeable debt on our credit cards and overdraft facilities.
I still clearly remember the day I realised just how out of control our finances were. My husband’s new job paid less, but the upside was a potential bonus.
When he received his first bonus, I was so excited because we really needed to do some renovations on the house. He looked at me as if I was crazy.
“We have to use this to pay off the overdraft,” he said.
What overdraft? I had been blissfully unaware of how much money was coming in and what we were spending each month. It never occurred to me that it was the bank’s money I was spending when I was swiping the card.
Everything changed that day. I made a commitment that we would never be in that situation again and that I would never again stick my head in the sand.
Fifteen years later, our finances are comfortably on track and we live a good lifestyle. We have no debt except for our mortgage. Our retirement funds have recovered sufficiently that we will be able to retire at some point. Our emergency funds have allowed us to survive two subsequent spates of unemployment.
Working hard to build up my freelance business has been an important contributor, but by far the biggest change came with our change of attitude and the decision to take control. Four key actions got us back on track:
1. BUDGETING: We learnt quickly that you cannot try to get out of debt without having a budget. This is the cornerstone of any financially healthy household. We started a monthly budget using Microsoft Money. Today, we still do our budget, although now we use the budgeting app 22seven.com.
There are always luxury items we can cut back on if we see that it is going to be a tough month. Prioritising our spending also helps. If we know we have to service the car, we postpone fixing up something in the house a month. I have noticed over the years that if we don’t do our budget regularly, we always end up overspending. Knowing how much we have in the bank and what we can spend keeps us on track.
2. SPENDING CASH: Once we had worked out our budget, we would physically withdraw the money to pay for our day-to-day expenses. We had separate envelopes of cash for food, petrol, entertainment and clothes. Once that envelope was empty, there was no more money to spend.
It made us think about every purchase we made and there were several months when we ate baked beans for a few days before month end. It also taught us how to plan better and to spread our money over the month.
We did that until we were comfortably living within our means and we were out of debt.
3. CUTTING DOWN ON CREDIT: We realised that one of the reasons we had so easily fallen into debt was our overdraft facility. We would just spend as long as the cards were accepted at the shops. We never thought about whether it was “our” cash or the bank’s money.
We closed our credit facility on our current accounts. If we go into debt again, I want to know exactly when and by how much. One of the problems with paying down debt over time is that you still have to keep the overdraft facility until it is paid off. In our case, we partly settled the debt using my husband’s bonus. You can also ask the bank to ratchet down the facility as you pay it off so that there is no credit available.
4. NEGOTIATION: Having just had a baby, we had a few medical bills we couldn’t pay. We contacted the service providers and asked them if we could pay off the bills over six months. It wasn’t an easy thing to do because we had to swallow our pride, but we were amazed at how accommodating people can be.
In every situation, they agreed. The fact that we had contacted them before they had to spend money on debt collection gave us credibility. What I learnt was that, ultimately, deciding to get your finances in order is a state of mind. Strangely, there is a perverse sense of enjoyment in going without to get financially healthy.
We didn’t mind those nights opening the last can of beans because we knew we were in control and getting out of debt. I have seen a similar reaction from this year’s Absa/City Press Money Makeover candidates.
Rather than seeing the money boot camp as a sacrifice, they see it as empowering. Maybe we derive more pleasure from some form of discipline and a set of rules to guide us than we do from just living day to day.
. Banks are offering a payment holiday to customers in good standing.
Doing this will not affect your credit record.
. Life insurers have said they will assess requests on a case-by-case basis.
Hennie de Villiers of the Association for Savings and Investment SA says: “Life insurers have looked into ways of making premium relief possible for policyholders who have been in good standing.
“But we would need these clients to contact their insurers urgently to discuss options.”
. Medical aid schemes will allow you to use your medical savings account to pay for premiums or to downgrade your plan.
If you still cannot make payments, contact them for relief.
Damian McHugh of Momentum Health Solutions says: “That will take the form of a deferment of premiums and then paying that back over a period of 12 months.”
. Short-term insurers are also offering discounts on car insurance as the risks of accidents are reduced during the lockdown.
The SA Insurance Association says: “Individual insurance companies have already and will continue to put different measures in place to assist policyholders.”