Financial insights from the rain

Three afternoons of rainfall have made a world of difference – cooler temperatures, greener, healthier-looking plants and grass. Although it is still early to say the drought has ended, the crops will bounce back strongly with some regular and sustained showers and further cement the financial parallels with the rain: seasons and cycles, storage, and long-term growth.

A drought is a part of the cycle of nature, which rain brings an end to. It is an extended period of little or no rain, resulting in lower agricultural output and yields, scarcity and higher prices. A financial drought is marked by misalignment between income and expenses due to the shrinkage of income resulting from reduced hours, lower commissions, job loss and business slowdown, on the one hand, and increasing bills on the other. The solution is generally to reduce expenses, but encroaching on savings and investments and borrowing are common.

Steps to take to establish stability include reducing expenses by cutting, pausing or eliminating expenses, especially the discretionary ones; prioritising high-impact bills relating to home, vehicle and insurance, to protect shelter, mobility and coverage; and activating liquidity by using emergency funds before encroaching on investments.

Agriculture depends on rain, which is beneficial to it, unlike drought, which is harmful. Although many people enjoy steady employment, employment is not assured . Some types of employment are seasonal, while others, though steady, yield fluctuating and uncertain income. Commission-based employment is one example.

Expenses are also seasonal. For example, it is back-to-school time and parents are swimming upstream to source the funds to buy books and uniforms, and pay fares, supplementary fees, and other expenses. This is a very difficult time in the expense cycle, especially when there is no income spurt that coincides with the expense spurt.

Budgeting is the best tool to align spending with income – expected ‘rainfall’. Some people increase their ‘rainfall’ by earning from more than one source, and the lucky ones fall back on remittances from relatives and friends living abroad, while some use the deep-rooted ‘partner’ plan to provide the required funds to meet programmed expenditures.

Our political leaders are increasingly seeing the value of storing water. Notice their efforts to distribute water tanks and plans to build other facilities to store water for the public – which reminds me of my time growing up in Claremont, eastern Hanover. There is a water catchment which used to feed water into two tanks – the covered one for drinking water, the open one for water for general use. From the former, water flowed through large pipes into a little house where residents then collected water at smaller pipes. In the earlier days, I understand, two buckets of drinking water sold for one farthing, and even back then, who managed the facility depended on which political party was in power! The structures remain today – a historical relic – with grass growing wherever it can and water unable to make its way into the tanks.

Catching and storing water in the rainy season is vital to the supply of water in the drought season. Many households across the country have their own water tanks to provide for present needs and to store water for the dry season or when the public water supply fails. Likewise, an emergency fund, savings and insurance serve as financial catchments that protect households in the financial drought of reduced income – or no income.

Although rain waters the seed, it does not eliminate the need to plant wisely and to nurture the plants as they grow. Likewise, in a financial sense, it is important to invest prudently, avoid debt traps, and utilise investment instruments that align with goals, time horizon, liquidity needs and risk tolerance.

The crops that the rain feeds with water, so that they can grow and provide sustainable income for households or reduce how much they spend on agricultural produce, need time and care. Building wealth takes time, careful attention and resilience, for the results will not always go as expected.

And while rainfall is good and desirable, few people like it when it is so torrential that it causes a flood and devastation, the effects of which can be as bad as a drought. In a financial sense, a flood can represent a significant inflow of money – which is generally good – but it can also represent multiple bills being due at the same time, debt balances rising faster than one’s ability to pay them, and the value of assets eroding because they are being liquidated to pay debt.

The expression “Save for a rainy day” emphasises prudence and foresight – putting resources aside for the unexpected. But considering the benefits of the rain, including in a financial sense, it makes sense to ‘save when it rains’, for it is the best foil against drought.

Oran A Hall, author of Understanding Investments and principal author of The Handbook of Personal Financial Planning, offers personal financial planning advice and counsel. Email: finviser.jm@gmail.com.