The past few years taught us a few financial lessons that we can use in 2023 to ensure that we are not caught in a bigger financial mess.
We have to be prepared for a crisis in the short term, think about the long term and educate ourselves about investments.
Firstly, the pandemic and lockdowns meant that many people could not earn a living, while few had savings to fall back on.
Then, just after the lockdown measures were all lifted and everybody looked forward to a better financial future, the war in Ukraine started and runaway inflation caused interest rates to rise.
“The last few years were tough on so many people, but we must now use the lessons we learned to ensure we are not caught out again, says Brett Mackay, consultant at 10X Investment.
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Lesson 1: prepare for a crisis in the short term
Mackay says a key personal finance rule reinforced now is how important it is to have some kind of emergency fund or short-term savings account that you can access in times of crisis.
“Remember while investing will build your wealth, saving will secure it and therefore this is probably not an investment, but rather a savings plan.”
If your income is suddenly interrupted or reduced or if you suddenly face an urgent and unexpected crisis, having an emergency fund or short-term savings account with enough funds to substitute income can be a lifesaver.
Mackay advises consumers to use a Money Market Fund to ensure that their savings are easily accessible to avoid taking on debt to cover emergency expenses.
“When times are tough, having 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.”
He adds that having funds in a short-term savings account also offers the flexibility to load up on assets when there are dips in the market.
“There has been a lot of stock market volatility over the last few years, which creates good opportunities to invest extra funds when unit prices are low.”
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Lesson 2: Think about the long term.
However, it is also important to think about the long term. Mackay says unfortunately investors are more likely to do the opposite of buying in a dip: they sell but selling your investments after prices fall will simply lock in your losses.
“In other words, it will prevent you from regaining lost ground when the market turns upwards again, which it inevitably does.”
As a general rule of thumb, especially with long term investments, it is better to keep your eyes fixed on the horizon.
“You can expect volatility in the short-term, that is part of long-term investing. The dips will be followed by spikes, followed by dips and spikes, but the long-term trend is upwards.”
Therefore, you are better off ignoring the short-term volatility and keeping your eyes on the horizon because tackling long-term goals, such as retirement as long-term projects is the best chance of success and makes it far easier.
Mackay says it can be hard to ignore the noise in investing as it is in life, which is why so many of us live day-to-day, focusing on our immediate needs.
“Especially in a time of inflation and rising interest rates, like we find ourselves now, 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.”
The urgency of our short-term needs often diverts our attention from something equally important: our long-term needs and we must not let that happen.
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Lesson 3: Educate yourself
You are the one who cares about your money the most and therefore you have to ensure that you know enough to take care of your money properly. You can educate yourself by asking questions such as:
- How much am I paying in fees?
- What difference will that make to my overall savings in the long-term?
- Am I using the available tax incentives to lower my tax bill and boost my savings?
Mackay says 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.
“It is never too early or too late to start. The best time to start is when you start earning a living, the second-best time is now.”