What’s the weakest link in your finances?

By Larissa Fernand |  12-10-20 | 
 

My mother used to be pretty hooked onto the British television quiz show The Weakest Link. The acerbic putdowns, witty sarcasm and vindictive flavour only added to its allure. My heart went out to every participant who was at the receiving end of Anne Robinson’s coldly dismissive “You are the weakest link – goodbye!

If you have never watched that game show, you would have definitely come across the famous idiom, a chain is only as strong as its weakest link, penned by Thomas Reid in Essays on the Intellectual Powers of Man.

The weakest link.

Have you ever considered this with respect to your finances?

The Theory of Constraints looks to identify the most important limiting factor (constraint, bottleneck, weakest link) that stands in the way of achieving a goal. Once identified, it must be worked upon so that it is no longer the limiting factor.

Now apply that to your finances.

Your entire financial situation is only as strong as its weakest link. You need to identify that and rectify it with urgency. Pick that weak link that will have the potential to unleash havoc on your finances. Then work on eliminating it to achieve financial stability. Here are three.

The weakest link: Lack of insurance.

You never buy medical insurance because you hope to submit a claim someday. You never buy term insurance because you hope your loved ones can submit a claim someday.

You buy it to protect yourself and your family against awful and tragic events.

That is why you need to get your insurance needs sorted out even before evaluating investment alternatives.

Let’s look at the situation of an individual who is the sole breadwinner of his family. He has a wife, two school-going children and partially supports his parents.

Irrespective of how well he is earning, and what a well-diversified portfolio he has, he is the weakest link. Simply because he is the primary source of support for so many individuals. Their future and provision are dependent on him.

Imagine the tragedy of this individual being involved in a fatal car crash. To eliminate this weakness, he must have a substantial term insurance cover.

The same applies to adequate health insurance cover, not only for him but for every single member of his family. You need just one illness to cause a major dent in your savings.

Insurance takes care of the weakest link in a person’s financial chain.

The weakest link: Saddled with Debt.

Falling behind with debt can become a huge roadblock to financial freedom.

It is hard to comprehend just how expensive debt can be. It has financial repercussions, an emotional cost and steals you of your peace. Sporting a lifestyle with money you do not have is a very dangerous way to live.

When you tell yourself that you are using it as a stop-gap arrangement, be aware of the long-term damage. Using a credit card is fine if you pay it off completely by the end of each billing cycle. When you service your credit card debt of around 24% annualized, be extremely mindful of the fact that this debt costs you a lot more than you can ever earn elsewhere. Even if you are servicing a much cheaper loan – say 12% per annum, once you clear it there is an immediate return there.

When you accumulate debt, you do so based on assumptions. You assume that you shall be earning much more in the future that entitles you to splurge today. You assume that you will never be unemployed. You assume that in the future not only will you clear your debt but even stack up on your savings that have lagged. You assume that you will have sufficient funds in your retirement kitty to help you maintain your lifestyle (despite your personal rate of inflation being high).

The assumptions are not only foolish, but frightening. Debt grows faster than anticipated. It takes longer to pay off. It cripples your ability to save. And the weight of these lifestyle decisions will hit you even harder down the road. You could jeopardize your entire retirement by your extravagance today.

Debt may get you noticed and grant you momentary satisfaction, but will never help you win. Get ahead of it, pay it down, decrease your stress levels and save for the future.

The weakest link: Lack of an Emergency Fund.

What do you do when life throws you a curveball? Or bowls you a googly? When disruptive events occur, it is natural to get anxious and tense. The idea of having an emergency fund is so that you will not have to deal with monetary stress, in addition to the emotional turmoil you are already battling with.

To some extent, we can provide buffers. Life insurance will help cushion the blow from losing a breadwinner. Medical insurance will cover up huge bills. But what if it is neither? There is job loss. Unprecedented travel to visit a relative who met with an accident. Urgent and extensive repair needed on the house. The unexpected takes place. The unpleasant does occur. Stuff happens. And yet, the bills and payments never stop.

You can use your credit card or take a personal loan, but we discussed why that is not a good option. Borrowing from family or friends has its own share of humiliation and obligation. And eventually, all these loans have to be squared off. The absolutely last thing you should be doing during an emergency is getting into debt.

The danger of not having an Emergency Fund is that you will either get into debt, or you will tap into your existing investments. Your provident fund. Your retirement portfolio. Your child’s education fund. That money is being saved for a very specific and real purpose. And if you pull out of it, those goals will be in jeopardy. Not to mention the fact that you may be forced to sell at a bad time and incur a loss, in addition to tax implications.

Be prepared. Have an Emergency Fund that has 6 to 12 months of basic living expenses. This actual amount will depend on whether other family members are employed and the number of dependents.

Identify your weak link and deal with it.

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