Though many South Africans might rely on different forms of income – whether you are formally employed or a business owner who takes on various positions – most of us are reliant on a steady stream of income from month-to-month to meet our expenses and grow our savings and investments.
For that reason, facing a loss of income can naturally be stressful and concerning – especially if this occurs suddenly and we have dependents or additional expenses which, if not met, can place us in financial jeopardy.
Few people can ever truly expect or prepare for a sudden loss of income, and even the most well-laid out plans often can’t prepare you for the varying nature of exactly how your finances may be positioned after one.
However, an important approach to take is to rather practise planning, than to practise a plan – by understanding what process you can follow, you can aim to make the best of your present situation and plan for a brighter future.
The first, most important step you can take is to remain calm. Though a sudden loss of income can be upsetting and frustrating, there are few scenarios which are difficult to fully recover from. Although your plans may take time to implement, know that any hardship you may face will be temporary and that with the right tools, you can successfully adjust your budget.
3 action steps to take
Once you’ve heard and recognised that you will be facing a sudden loss of income, the first action step you can take is to calmly assess your financial situation. There are three key measures you can take to adjust in the short term, namely:
1) Reconsider your budget
If you have an up-to-date budget or have yet to start one, prioritise laying out your finances to have a solid understanding of your expenses, your needs, and lastly, your wants. Although it may be a grim question to ask, you will need to consider what monthly expenses are essential, and what you could afford to do without. Exploring our 40 massive money-saving tips can also help you reduce your expenses.
Laying out non-negotiable expenses (such as account expenses that are on credit or fixed terms that you may be able to reduce in the short term, but not stop completely) versus negotiable expenses (such as entertainment budgets or month-to-month subscriptions) can help you prioritise which accounts and expenses you need to settle, which figures you can negotiate, and which payments you could cancel without further fees.
Whether you already use a monthly budget or are ready to get started, why not download our free template here?
2) Leverage your emergency fund
If you’ve already set up an emergency fund, consider whether your present situation demands that you use this money to meet either unforeseen expenses or to cover the shortfall between your normal level of income and your present situation.
Remember that facing a loss of income may not be limited to one month or two, and might involve an indefinite amount of time before you can resume your normal activities. In that light, consider on what basis you plan to use your emergency fund and how long it may last should you choose to use this fund for certain purposes.
3) Check your existing insurance policies, if applicable
Your existing insurance policies may provide you with either coverage or additional coverage in the event you face a loss of income, and in that case it’s important to see what events you may already be covered for. Using insurance coverage can help you bridge expenses, and it may be able to settle medical fees or other related expenses.
Life and disability insurance
Life and disability cover pays out should you either pass away, or suffer a disability that prevents you from working and earning an income. In the latter case, disability insurance may pay out if an accident or illness prevents you from being able to work to your fullest capacity. Though coverage can differ from employer to employer, it is worthwhile to investigate whether this benefit may apply in your present circumstance.
Critical illness cover can assist in funding your medical expenses in the event that you contract what is called a ‘dread disease’ – such as cancer – and can help you settle major expenses should an illness prevent you from earning income.
Credit insurance – sometimes also referred to as credit life insurance – is a policy designed to assist you when you are required to make repayment on a longer-term loan (such as a 12-month personal loan or a bond) but can no longer afford to due to unemployment or illness. Credit life insurance policies are usually unique from lender to lender, and our helpful guide can help you determine if you are eligible to make a claim.
Submit an application to the Unemployment Insurance Fund
The Unemployment Insurance Fund (UIF) is a national insurer which is designed to cover employees who have either faced retrenchment or a loss of income. All permanent employees in South Africa are required to contribute to the UIF each month, and in turn are eligible to claim from the fund should they be required to.
While the terms of any eligible coverage the UIF may be able to offer is dependent on the circumstances behind your loss of income, you may be able to supplement your existing finances by making a claim. The UIF website offers guidelines on how you can apply.
Verify if you can work another part-time job if you’re working short hours
Although your employer may have policies in place around freelance or part-time work, there is no restriction on asking whether you can do so – and should you be able to, you will usually be allowed to work freely as long as you do not perform work for a direct competitor.
Contact your credit providers immediately
In the event a loss of income means that you’re unable to repay your credit agreements, ensure that you contact them directly and request to set up a personalised repayment arrangement which will allow you to manage your finances.
Unlike other service provider accounts, credit providers will charge additional interest if you fall behind on your scheduled payments – and informing them of your financial situation will empower you to set up repayment schedules that both minimise the potential interest your account may accrue as well as ensure that your repayments don’t enter a ‘debt spiral’, where you are progressively faced with more debt to repay thanks to compound interest.
To prioritise your repayments, consider using the snowball debt reduction method, which can help you prioritise your cash flow and settle debt with the highest interest rate first.
Query whether you can take a payment holiday
In some cases, lenders may choose to offer their borrowers a ‘payment holiday’ should their circumstances change. A payment holiday is an agreement where a lender will allow a borrower to either temporarily stop or reduce their monthly repayments.
The terms of the agreement vary from lender to lender. In some cases, a lender may charge interest accrued over the payment holiday, or may not charge any additional interest on the provision a borrower returns to make full loan repayments at an agreed date. Each agreement is relevant to a borrower’s circumstances and needs to be reviewed carefully.
If you’re considering a payment holiday on a long-term loan such as vehicle finance or a bond and your circumstances have changed, it is worthwhile to check whether you have an active credit insurance policy on your account, as your coverage may offer you more favourable terms than a payment holiday.
For example, your credit insurance policy may cover several months where you are unable to repay your loan – meaning that you would not need to pay additional interest to cover this period as you may need to with a payment holiday.