With many households and individuals becoming stretched as costs of living increase, I often think of the quote made famous by legend investor Warren Buffet:
“Only when the tide goes out, do you learn who has been swimming naked."
The concept of swimming naked refers to living a life and making choices that can leave you vulnerable to the risk of financial ruin, should the situation change. Examples of these may include:
Not having a budget
Buying a R1m house when you qualify for a R1m bond
Buying a R500 000 car when you have received a R500 000 finance approval
Investing without sufficient savings(emergency fund)
Using leverage to build wealth
Having high-interest unsecured loans and overdrafts
Buying food and month-to-month necessities on credit
Incorrect asset allocation on your investments
It is easy to see that most financial hardships emanate from debt. Most global economies are currently in an environment of rapidly increasing interest rates(the tide going out), which results in higher debt servicing costs, and in turn, higher repayments. This has had a negative impact on most people's finances, to the extent that some are using credit to survive on a month-to-month basis, while some are defaulting on their debt and even surrendering their secured assets. It is tough!
You don't want to be in a position where you are forced to sell assets in order to stay afloat. On the flip side, these are the opportunities those who are comfortable and have deep pockets thrive on. They have the opportunity to pick up assets at considerable discounts. It is sometimes easy to see why they rich get richer and the poor get poorer.
How do you make sure that you aren't caught swimming naked?
Humans have unlimited needs, and limited means. There are things that you can do with your money. Then there are things that you can afford to do - without jeopardizing your finances. It is important to know the difference between the two, and know which ones apply to you. Set some boundaries & rules of thumb around these, and apply sensibly.
Some practical examples:
Have a budget
If you qualify for a R1m house, limit yourself to only 50 or 60 percent of that allowance
For a R500 000 vehicle asset approval, you can limit yourself to 50% when shopping for a vehicle
Build a sufficient emergency fund, 3 to 6 months of your expenses, the more the better. This will give you breathing room for when the situation changes
Keep unsecured debt to a minimum(less than 30% of your limits), better if you can avoid it altogether
Downgrade wherever you can and avoid buying food & necessities on credit
Look at ways to improve your asset allocation in order to better meet your financial needs
The key is to clearly define your priorities and be sensible in your application.
Remember, DEBT IS RISK. The more debt you have, the more risk you carry...
What other ways can you use to avoid swimming naked?
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