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The potential impact of COVID-19 on household financial wellness in SA

While most of the focus has been on how COVID-19 has impacted corporates, little light has been shed on how this will affect household financial wellness in SA. Johann van Tonder, Economist and Researcher of Financial Wellness at Momentum, recently explained exactly how this pandemic is going to affect the five elements of financial wellness.

According to van Tonder, the economic impact of COVID-19 is already being felt and it’s only going to get worse from here on as the economy drastically loses momentum in a 21-day lockdown. The reality is that household financial wellness is closely connected to economic growth, so an impending recession (which is almost certain to happen) will take an unquestionable toll on our financial wellness as well as our financial success. But, if we make the right adjustments, we can recover.

The latest Momentum/Unisa Household Financial Wellness Index shows that only 25% of South African households are classified as financially well. The current COVID-19 crisis is sure to make a dent in these numbers if we don’t start understanding how.

Financial wellness consists of five elements, namely:

1. Assets, debt and wealth
2. Income, expenditure and saving
3. Living environment
4. Education status, and
5. Personal empowerment

Van Tonder points out that the pandemic is going to affect all of these elements.

Assets, debt and wealth

This element relates to the value of financial assets invested on the stock exchange and fixed securities as many households scramble to cash out their investments to earn an income. As financial assets (i.e. pension funds and investments) comprise the largest share of total assets, and as these are invested in shares and fixed securities, their value will decline in harmony with the value of shares and fixed securities.

“At its lowest level, the pandemic contributed to financial assets decreasing by about R2 trillion, or 21% since the end of 2019. However, these are losses on paper only and will remain theoretical if households hold tight and refrain from cancelling their investments,” van Tonder remarks. “Over the past few days, since governments all over the world took measures to soften the impact of the virus, the value of financial assets already regained R400 billion, or 20% of the losses. As the spread of the virus slows and is brought under control, the losses will be erased gradually. However, it will take time to bounce back”.

Income, expenditure and saving

As businesses close, households will struggle to earn an income, spend and save. The full impact of this is yet to make its way through the economy and will only truly be felt within the next three to six months. However, as a result of the Governments’ measures and the assistance of companies, the impact will be softer than initially feared.

Van Tonder advises that employers are going to have to seriously consider moving the retirement age of their employees out by at least a year (e.g. from 60 to 61 or 65 to 66). “This will give many households the time they need to recover from the effects of the coming market crash on their retirement investments,” he says.

Personal empowerment

Fake news, the lack of information and disbelieving credible news sources can lead to poor choices that will negatively impact both financial success and financial wellness.

Living environment and education status

The lockdown will also put more pressure on maintenance and hygiene – and households whose hygiene is compromised will experience pressure on their living environment.

The education status of current learners and students will also be under huge pressure following the closing of schools and universities.

Should this virus redefine how we view financial success?

Van Tonder highlights that it is important to realise that success can’t be achieved without setting goals. Long-term goals can only be achieved if they align with short-term goals. “Put differently, by achieving short-term goals, you are closer to your long-term goals.”

“The pandemic and lockdown will only impact financial success if you allow it to affect your goals. Yes, the value of your financial assets may have declined sharply, but, as with all other financial market crashes and economic recessions, it always recovers.”

Van Tonder also emphasizes the critical role of the financial adviser to assist clients to help them reassess their long-term goals and bring them in line with the current circumstance.

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