You can’t predict the unpredictable – but you can limit the stress
31 October 2018
What do you lie awake worrying about at night? In a major piece of research in the US a couple of years ago, a leading financial services group sought to find out. In the financial space, it emerged that our biggest fear lies in the unexpected - unexpected expenses, or losing our source of income.
Most of us have at some stage in our lives tossed and turned in the small hours worrying about money matters. This is not only stressful, but also very unhelpful. Though we can’t plan for the unexpected, Moses Duma, Head of Customer Value Proposition points out that we can plan in a way that minimises the impact that these unpredictable events have by creating a financial buffer.
Sylvester Kgatla, Head of Absa Fund Managers offers an excellent general strategy for doing so, using conventional options that facilitate the planning like a tiered strategic approach. And, while this strategy might not be a great fit for everyone because of the personal nature of financial planning, it’s a good discussion to have next time you meet with your financial adviser.
According to Kgatla, this is what the tiered strategic approach typically looks like:
Tier 1: Short-term buffer
This is typically a bank product like a fixed deposit or a call account for those who want guaranteed capital and/or income. Alternatively, money market or income unit trust funds are low-risk in nature, but they don’t explicitly guarantee capital and/or income. This usually caters for emergencies such as a major car repair. On the upside, it’s a risk-free form of savings and investment, but on the downside, the interest or return seldom beats inflation.
Tier 2: Medium-term investment
Think of it as being your three to five-year strategy. Perhaps you anticipate that within about three years you’re going to want to replace your car, or maybe there’s a big birthday coming up in a few years, and you’d like to take the family to celebrate somewhere exotic. The longer timeline means you may have the appetite for a bit more risk. In this category you’ll still want to limit that risk to fluctuations on the return side, while keeping the capital safe. Your gold-standard options here will be moderate to medium-risk unit trust funds, and low-equity multi-asset funds, which will give you returns that beat inflation with limited risk.
Tier 3: The longer-than-five-year buffer
This is likely to be used for things such as your children’s university education, or simply to maintain your sense of security. The market flattens risk over time and this is where you’ll likely get the best returns, so your allocation can go into, for example, medium to high-risk unit trust funds such as balanced funds or equity-only funds, or a mixture of growth assets such as shares, government and corporate bonds and property securities.
According to Kgatla, the beauty of the three-tier system is that it prevents you from “dipping into the wrong pot” when you suddenly have extraordinary financial needs. But as we’ve said, it’s important to discuss your unique financial needs with an accredited financial advisr before adopting a financial strategy.
To encourage you to become more proactive about creating savings buffers, we’ve extended our Rewards programme beyond banking products and into the investment and insurance categories. Rewards include access to some really useful partners and it accumulates according to the number and value of Absa products that you hold. It’s an impactful way to amplify the value of your savings and you can then easily use the Absa Rewards Cash Back to start your savings journey by buy unit trusts.
Talk to your financial adviser about these investment solutions and how to best leverage the products that we have available to you. Alternatively, send an email to firstname.lastname@example.org and our Virtual Adviser will call you back.
Disclaimer: The advice contained on this blog is for general purposes only and does not take into account individual circumstances, objectives or financial needs. Accordingly, readers are advised to seek appropriate advice from licensed professionals prior to making any investment, or taking up a financial product or service.