Ride the crisis by ensuring good value from financial products
If your finances are tight, these are the products you could critically review to see if they are really offering you value
If the salary cuts, job or contract losses that have accompanied the coronavirus pandemic have left you reviewing your expenses, you may want to take a look at whether you are getting your money's worth from all the financial products you use.
This week the Association for Savings and Investment (Asisa) released statistics for the first half of the year, showing that 5.4-million policies for life, disability, dread disease and income protection had lapsed.
A policy lapses when you can no longer keep up the premiums, and the cover that you need to protect yourself and/or your family ceases. It can cost you more to reinstate that cover later as your insurer will price for your age and any health conditions you may have when you apply.
The Asisa stats also showed that hundreds of thousands of South Africans have stopped making contributions to retirement annuities - also products necessary for your financial wellbeing in your later years.
If your finances are tight, these are the products you could critically review to see if they are really offering you value.
The 2019 Old Mutual Savings and Investment Monitor shows funeral insurance is SA's most widely used financial product, with three out of four households paying for it.
Funerals are expensive, so it makes sense to have this cover if you do not have sufficient savings for such a cost. But funeral cover is also expensive, so do not use it as a savings product or as life assurance.
One funeral insurance provider told Money that its research revealed South Africans are taking out funeral cover for extended family but when a member dies, only a portion of what is claimed is offered as a contribution towards the funeral. The policyholder keeps the additional cash.
It is possible - but highly unlikely - that you could benefit from such a practice. Funeral premiums increase steeply when you add older relatives. It makes sense to cover only what you need.
Many South Africans also have multiple funeral policies instead of taking out cheaper life cover to provide for family after their death. If you are young and healthy, answering medical questions and having a blood test is likely to reduce the cost of your cover.
Savings in a bank account
Your savings in a bank account could well have a lost opportunity cost.
You definitely need some money readily available to pay for any emergencies, but check if there is money that can't serve you better - especially if you have debt.
Many people have savings accounts but don't know what the interest rate is or if it allows their money to grow.
Currently Sasfin is offering one of the best rates on a R10,000 deposit that is available daily: 4.9%. But if you are saving R1,000 a month in a bank savings account, you will only earn 3% - less than the current inflation rate of 3.2%.
Unit trust money market funds are currently yielding around 3.8% to 4.2%.
If you don't need the money immediately, invest in something with a longer-term horizon to improve your potential returns - just a little exposure to bonds instead of only cash, for example, can enhance your returns
by a percentage point.
If you have money in your transactional bank account, consider making it work harder for you - last year Capitec estimated there is R295bn of "lazy money" in accounts that don't earn any interest.
If you are investing for a long period, time is a free guarantee that you won't lose money (see graph above). Guarantees provided by investment companies for the likes of structured products or smoothed bonus portfolios are a trade-off - you give up some of your potential return to be sure you don't lose capital.
You typically get only a partial guarantee because markets seldom fall by more than 50% but the cost is certain and ongoing.
Many independent financial advisers are very critical of these products as they believe that by structuring your investments correctly for shorter- and longer-term goals you can avoid using them.
Andy Hart, a UK financial adviser who recently hosted the second Humans Under Management conference for advisers in SA, says a good adviser won't need to do much more than set you up with a globally diversified appropriate portfolio of equities and some bonds. Most of the adviser's work after that will be managing you, the human, to make sure you stay invested the way you need to. The markets will do the rest of the magic, he says.
Investors are always asking whether they should worry about issues such as the price of gold, the price of Tesla stocks, the US election, the national debt - the answer, if you have invested correctly from the get go, is always no, he says.
Call centres are in operation again and credit card providers are eager to flog you another card. When you have a credit card you will incur monthly fees, credit facility fees and interest. The fancier the card, the more they cost. You need to know if the cost is worth it and have a good reason to have more than one card. That reason should not be to increase your credit limit.
The most savvy way to use a credit card is to spend only what you can pay off each month before the 55-day interest-free credit cycle is up. That way you will not pay any interest. You can appear to be a big spender with a fancy card with a big credit limit, but only your bank gets rich when you owe.
Credit card interest has come down with interest rates, but you could still be paying as much as a hefty 17.5% in interest on credit.
Credit cards and other financial products often come with loyalty programmes. If you are paying for these, make sure the benefits you reap exceed the cost.
Car dealers are equally eager to hook you in on a "good deal", but if you have to buy or have bought using vehicle finance you could be paying up to 20.5% in interest for a car you are using less.
Now is the time to review the need to drive a status symbol - rather underspend than overspend on a vehicle.
If possible, keep up with your income protection premiums, setting aside money for emergencies and retirement savings, and keep paying down, rather than ratcheting up, your debt. The stronger your finances are, the easier it will be to ride - and for some to even benefit from - this financial crisis.
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