Unlike in previous recessions, the pandemic economy is likely to follow what economists are calling a ‘K-shaped’ trajectory. This means that while some industries and sectors are shrinking (the lower, downward-sloping part of the K), others are showing signs of growth (the upper part of the K).
According to Sharon Moller, Financial Planning Coach at Old Mutual Wealth, this ‘K’ effect applies to South African households, too, as some families face falling income through no fault of their own – as a direct result of the recession – while others experienced lockdown savings and increased disposable income thanks to remote working and fewer entertainment options.
Moller warns that those families fortunate enough to find themselves on the upper half of the K must take great care not to be tempted by ‘lifestyle creep’ – where spending power is swallowed by discretionary expenses (those ‘nice-to-haves) that actually harm financial security over time.
“Despite what we tend to believe, having more money doesn’t necessarily result in fewer problems or greater security. When we have more – perhaps because we’re spending much less on petrol or happen to work in a growing sector – our standard of living typically improves and former luxuries quickly become perceived necessities,” she says.
When additional income is not used consciously to build real financial resilience (such as in the form of an emergency fund, for example) or lasting wealth (in the form of solid long-term investments), it simply doesn’t bring the peace of mind we imagine it will.
“If our relationship with money is fundamentally unhealthy, having more of it does not give us greater financial freedom in the truest sense,” explains Moller. “This is because, in many cases, the problem lies in our relationship with money, not the amount we earn.”
The trick here is to improve your financial health by working with what you’ve got now, rather than believing that more income would equate to greater security. As for the how, Moller offers the following steps
1. Know thyself
“We need to take an honest look at our relationship with money,” says Moller. Answering the following questions can help you to become aware of limiting beliefs:
- What patterns can you notice in your spending? What motivates you to spend in this way?
- How are you holding yourself back from earning to your full potential?
- Do you need more structure in your financial life? More budgeting or a debt consolidation plan, perhaps?
- What kind of debt do you have? if it is not healthy debt such as a bond on a property, then why do you have that debt? What patterns of behaviour can you notice here?
2. Infuse your finances with purpose
“The internal work must come first,” according to Moller. “It starts and ends with understanding your purpose in life. To do so, you need to get in touch with what is truly meaningful to you. Once you understand what that is, you can live with more purpose and spend in alignment with that purpose.”
What are your biggest priorities or goals in life? List 10, then rate them in order of importance. Your top three are where your time, energy and money should be taking you.
3. Get working
Now that you’ve got your why sorted, it’s time to focus on how, says Moller. “It may seem like a very tall order to get your money habits to a healthier place, but by focusing on a few small-ish steps at a time, you’ll begin to notice things changing and improving for the better”.
- Save as much as physically possible. This might mean giving up on some of the spending that doesn’t align with your purpose. “Based on the list you’ve put together, what are some items, habits, or luxuries that you can forego (for now) in order to best align with your priorities,” she says.
- Invest your savings. Investing means putting your money into something other than cash in your bank account to ensure it beats inflation over the long term. To do so you might need the help of a professional.
- Find a financial planner who will not only help you invest accordingly but also support you in bringing purpose and meaning to your money.
“Because of the value society places on perceived status, we often let money and the pursuit thereof control us,” warns Moller. “On the flip side, gaining control and being thoughtful about your spending and habits may not be easy but it is extremely empowering and fulfilling work.”