“With lockdown in place and most children being restricted… some extended financial skill opportunities are missed out on”. (Sezeryadigar/Getty Images)

Looking back at the year gone by, three key lessons forced on us by the ongoing Covid-19 pandemic give some direction on we might adjust our budgets for 2022, says Brett Mackay.

1. Be prepared for a crisis in the short-term.

A key personal finance lesson that has been reinforced during 2021 is the importance of having an emergency fund, or at least a short-term savings account, in case of an unanticipated storm that comes out of nowhere and threatens to wreck your finances. This is not an investment, but more of a savings plan (while investing will build your wealth, saving will secure it).

Having an emergency fund or short-term savings account to dip in to as a substitute income can be a lifesaver if your income is suddenly interrupted or reduced. 

Taking on additional debt when you don’t need it is the opposite of being prepared.

When times get tough, additional debt has the opposite effect of having emergency cash. Not only will you have to pay back money for goods (or good times) bought in the past, you will also probably have to pay interest and costs.  

As a little side note, I would like to add that having funds in a short-term savings account can also give one the flexibility to load up on assets when there are dips in the market. Covid-19 has magnified stock market volatility, which has created excellent opportunities to invest extra funds when unit prices are low.

For investors in index funds, the dips are never as shocking or sudden, but there are definitely better periods to be using additional funds to build up your portfolio of funds.

2. Think about the long-term.

Unfortunately, investors are more likely to do the opposite of buying in a dip; they sell in a dip.

Selling your investments after prices have fallen will simply lock in your losses.

In other words, it will prevent you from regaining lost ground when the market turns upwards again. 

Unless you are investing to take advantage of a dip in the market, it is better to keep your eyes fixed on the horizon. There will be bumps along the road, but they are part and parcel of long-term investing. The dips will be followed by increases, followed by dips, but the long-term trend is upwards so you are better off ignoring the short-term volatility.

It can be hard to ignore noise in investing as well as in life, which is why so many of us live day-to-day, focusing on our immediate needs. It can be difficult to see beyond the ever-increasing costs of essentials, from groceries and petrol to school fees and the rent or bond payments. Often the urgency of our short-term needs diverts our attention from something equally important: our long-term needs.

The best time to start saving for retirement is the day you start working (the second best time is now). Tackling long-term goals, such as retirement, as long-term projects gives us the best chance of success and makes it far easier. 

The legend of how to eat an elephant comes to mind. (The answer is: one bite at a time.) Saving for retirement is like that. Broken down into small bites over a long period of time, accumulating what might seem like a huge amount of money (to support yourself for many years in retirement) becomes manageable.

Not only do your savings add up over time, leaving them invested means they will attract compound interest, which really is the secret sauce of success in long-term investing (The rate of return on your savings keeps growing because in addition to earning the return on your capital, you also earn a return on all the returns you have reinvested.) 

3. Educate yourself.

Nobody cares more about your money than you do, and the best way to take care of it is to pay attention.

Start by asking questions. For example, how much am I paying in fees? What difference will that make to my overall savings in the long-term? There are so many personal finance books and websites; you will be spoilt for choice for sources of information. 

The more informed and critical your approach, the more confidence you will have in your ability to make good decisions and defend your own best interests. Whether you are 25 or 65, it is never too early or too late to start. The best time is always now. 

Ask yourself: Are you making the most of tax incentives on certain savings products? The government wants people to save and invest their money to build their wealth, to build financial resilience and to take care of themselves in their old age. Therefore, when individuals invest money in certain savings and investment products they attract tax benefits.

Saving for retirement is a classic example of the government rewarding individuals for good savings behaviour by reducing the amount of tax they pay. Tax-Free Savings Accounts are another way to use tax incentives to turbocharge your investments.

Being knowledgeable is not only empowering – it can also be financially lucrative. 

The content herein is provided as general information and is not intended as, nor does it constitute, financial, tax, legal, investment, or other advice. 10X Investments is an authorised FSP (number 28250). Brett Mackay is an investment consultant at 10X Investments. Views are his own. 

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