Four months into the new year and the world has experienced so much loss. At the time of writing this article, global COVID’19 related deaths amount to 103 000 across 193 countries, and economies are bleeding financially because only essential services are operating.
Large economies such as the United States of America (USA) for example has seen a huge wave of retrenchments and unemployment claims increase by 17 million in the last three weeks. To date Lesotho has no confirmed cases of COVID’19, but the truth is that a significant number of Basotho staying at home are uncertain about what the future holds and are worried about job security.
Thirteen days into the nation-wide lockdown, many Basotho are suddenly faced with retrenchments as the pandemic continues to hit different sectors of the economy, with diamond mining and construction hit the hardest. As a result, some companies operating in these sectors in Lesotho have announced retrenchments. This is a disheartening and very scary reality!
Retrenchments happen when companies are faced with financial difficulties and are forced to reduce costs significantly, resulting in letting employees go. For many, retrenchment is a scary, stressful and difficult process. It suddenly forces one to make difficult and life changing decisions that may negatively affect one’s mental health, financial, emotional and physical well-being, leading to high levels of stress or depression.
In this article, I hope to share three money tips that will help you prepare should you be faced with the harsh reality of retrenchment. It goes without saying that life will never be the same post COVID’19 and the impact of it is unimaginable. This is affecting our family members, friends and colleagues, but how can one prepare to weather this financial storm?
3Determine the value of your retrenchment pay-out
I am of the view that the first step is to determine how much your retrenchment pay-out will be. According to Section 79 of the Lesotho Labour Code, Order No 24 of 1992 an employee who has completed more than one year of continuous service with the same employer shall be entitled to receive severance pay upon termination of his or her service. The severance pay will be equivalent to two week’s wages for each year completed, at a rate of the current wages at the time of termination.
This implies that an employer, who has not applied for severance payment exemption needs to provide you with severance pay when you are retrenched. Employers who have Pension or Provident Funds in place are exempt from severance payments and will thus pay out your terminal benefits. It is therefore critical to have an honest conversation with your employer to determine how much this pay-out will be, because this information lays the foundation for planning your finances and life post retrenchment.
2Draw up a new budget
The second step is to look at your monthly budget and prepare to make difficult, but necessary changes. Drawing up a new budget will help you plan your available income, re-evaluate and prioritise your expenses. The goal here is to stretch your income as far as possible by managing it effectively, because you do not know how long it will be without an income. It is important to cut off lifestyle expenses such as spending on luxury items and going out for example.
In some cases, the situation may require you to move back home to save on rent, groceries and utilities such as electricity and DSTV (if you have a single source of income). Being honest with yourself, your spouse (if married) and loved ones about this new reality is absolutely important. Speak to a qualified financial planner who can help you plan, adjust, commit and navigate the difficult changes. There are tools and resources also available to help you prepare and manage a budget.
1Debt management
The third step is to make an appointment with your financial services provider (FSP) to discuss your financial position. Many of us have financial commitments such as home loans, car finance, personal loans, credit cards and overdraft facilities. The loss of income because of retrenchment will definitely affect your ability to service your instalments and ultimately your credit score. It is thus important to have an honest conversation with your FSP as soon as possible.
The mistake many people make is waiting until it is too late to have this conversation. Please do not do this, because your FSP does not want to see you lose your assets. There are a number of strategies available to help you during this difficult time. For example, restructuring or consolidating your home loan to make the instalment more affordable. If you have a car loan, personal loan or credit card, there is a three to six month cover where you will not pay an instalment.
As a last resort, you can claim from the Credit Life cover to settle your outstanding loans. Make sure you have a letter of retrenchment in order to apply for these options. I will deep dive into these in my next article.
Conclusion
The reality is that a number of people have already received retrenchment letters and I cannot imagine what they must be going through. My recommendation when you receive your retrenchment pay-out is to use this money to settle outstanding debt (if any), restructure your life, finance any business ideas, finance postgraduate studies and take care of your day to day expenses. The amount is usually paid out as a lump sum which can be overwhelming.
Consulting a qualified financial planner to help you plan how to use the money and develop a financial plan becomes extremely important. My commitment is to keep sharing articles that will help you improve your financial knowledge and hopefully empower you to prepare for the challenges ahead.
Till the next article, please #staysafe, #staycalm and #stayhome.