Conflict and political uncertainty are making the current global economy unstable and difficult to predict. South Africa’s had its own share of uncertainty and economic downturn in recent years, although the installation of a multiparty government after the elections has had a positive effect on investment and the currency.

It’s harder to build wealth when times are tough, but if you develop a plan to do so, you’ll have more flexibility to maintain an optimum strategy when there’s an economic upturn. What strategies are effective to keep growing your investment portfolio when interest rates have gone up and there are fewer economic opportunities?

How do you build wealth in a recession?

• Understand your cash flow and net worth
  Many people don’t do this basic budgeting exercise. Knowing where your money comes from, how much income you have, and what you’re spending it on, is key to making informed decisions about what to do with your money. To work out your net worth, simply add up the value of your home (if you own it), investment accounts, bank account balances, and any other assets that you own. Then subtract any loans or debt you might have, like a home loan, car loan, store accounts, credit card balances, etc.
  
  If the result isn’t a positive number, you have a negative net worth. If you’re serious about growing your wealth, you may need to make some significant lifestyle changes. Remember, choices like the car you drive are lifestyle decisions, not investments.
  
  Whether your net worth is positive or negative, however, you need to create a proper budget, adjust your cash flow and your spending, pay off some debt, and invest in more financial or physical assets to start building wealth.
  
  
• Make saving an easy habit
  Putting away even a small amount every month adds up over time, and many savings vehicles offer attractive incentives to save. A powerful way to make sure that you save consistently is to arrange debit orders from your salary into your savings and investment accounts every month. You’ll never have to remember to make deposits, and the money will come off your income before you can miss it every month, making it easier to stick to your savings goals.
  
  
• Remember long-term investments
  Getting into the habit of saving is a great start, but what you do with those savings is just as important. Take any money you aren’t likely to need over the next few years and invest it for the long term – for example, in a well-diversified unit trust with a high proportion invested in shares.
  
  This type of investment is expected to yield returns a few percentage points above inflation over the long term, which means that the value of your money is growing – ultimately, you are creating wealth. It’s important to reinvest your interest and dividends in the same account so you can maximise your long-term growth with the power of compounding.

Getting ahead in a tough South African economy

South Africans are faced with a unique mixture of challenges, including our unemployment rate, a heavy tax burden, and urgent improvements needed in basic education, infrastructure, power supply and access to safe water sources. Inflation rates can erode your savings if they aren’t invested wisely, currency fluctuations affect your buying power and investment opportunities, and higher interest rates can make borrowing and debt more expensive. At the same time, of course, interest rate hikes offer better returns on your savings and investments.

Under these conditions, how can you be proactive?

• Consider entrepreneurship
  With so few formal jobs available, the entrepreneurial route has its advantages, though it’s not for everyone. The risks of starting a business are high, but there is also great opportunity. If you have a business idea, have you considered factors like its long-term viability, the demand for your products or services, and existing market competition? Research the opportunities and challenges of your idea thoroughly before you launch a start-up and get professional advice.
  
  
• Prioritise your emergency fund and retirement planning
  When you’re starting out on your savings and investment journey, focus on 2 areas first. Set up a savings account that you can access quickly as your emergency fund, and a long-term retirement savings plan. The emergency fund is for unexpected expenses so that you don’t have to withdraw from longer-term investments or take on debt in an emergency, and your retirement savings need to provide for you when you stop working. Consult a professional financial adviser to guide you through different types of retirement investments.
  
  
• Diversify your investments
  Diversifying your portfolio of savings and investment vehicles helps to smooth out economic uncertainty. If you are thinking of investing or are invested in the stock market, a broad exposure to the market at a low cost (for example, a passive fund) is a less risky strategy than investing in a handful of shares – but your best investment strategy will be unique to your personal circumstances. Seek professional advice to assess your personal investments needs, time horizon and risk appetite, so that you can plan and invest your money to align with your financial goals.
  
  
• Make use of tax-efficient vehicles
  Explore the various savings and investment vehicles that offer tax incentives under South African law. These include tax-deductible contributions to retirement funds and tax-free savings accounts.

Adapt, survive and thrive financially

If you’ve already put a long-term financial plan in place, you may find that you don’t have to change much to adapt to a tougher financial environment. The most important lesson is that in a weak economy with an uncertain outlook, you should have a plan to overcome short-term challenges and work towards getting back on track with your wealth creation plan. Often this means being objective and not emotional about your lifestyle choices.  

For long-term financial planning, Nedbank offers a range of savings and investment account options and expert financial guidance. If you’re interested in an entrepreneurial path to grow your wealth in unpredictable times, speak to our Small Business Services Team for guidance and support.