Whilst you can’t always control what the future holds, you can make sure you always feel in control of your finances. Here are some top tips to help you navigate the current financial landscape.
Whether it's looking at how to adapt to a now single-income household or how to make the most of the extra pocket money saved from not going out, Taylors Strategic Partner, Michael Sik - Financial Adviser and Owner of FinPeak Advisers - shares his best tips for taking control of your finances during the current pandemic.
As always, for advice tailored to your situation and needs, please talk to your financial adviser.
SMART STEPS FOR THOSE WITH REDUCED INCOMES
#1 Start With Your Income And Assets
There are two sides to budgeting: what you spend and what you earn. If your income has already taken a hit because of the COVID-19, you simply can’t continue to budget your money the same way. The first step in budgeting amid COVID-19 concerns is figuring out what your new income is over the next few months. The level of reduction of income will help you determine how severe the cut in expenses will need to be. For example, if you’ve experienced a 50% pay cut, then that may correspond to cutting 50% or more of your regular spending. This assumes that you’re spending the same amount you’re earning (or less) each month and not creating debt. If you were living above your means pre-COVID-19, then you may need to make even deeper cuts to get your budget to work. If your income has taken an unfortunate turn then you may be eligible to access some of the government’s stimulus packages. The two main benefits you may have access to is the JobSeeker via Centrelink and JobKeeper via your employer.
Next, look at what you have in savings that you might be able to tap into. Ideally, you have an emergency fund that can cover three to six months’ worth of expenses in place but if you don’t, you may be eligible to tap into your retirement funds by accessing a temporary early release of superannuation, this should be approached with caution as it may have a substantial negative long term effect on your retirement funding. Add up what you do have to see how you could use that to supplement your income. No amount of money is too big or too small. Even if you only have $500 or $1,000 in savings, that’s money you could use to help you cover your expenses until your income picks back up.
#2 Categorise Your Budget Expenses
Cutting costs can make getting through the current financial situation less stressful. Before you can do that, however, you first need to understand where and how you’re spending (talk to FinPeak here to see how their Wealth Portal can help automate this and give you a better handle over what you spend).
Whether you have a budget in place or you belong to the one-third of Australians who don’t believe they need one, make a detailed list of everything you spend money on in a normal month. Start with your fixed expenses first. This includes the essentials you need each month to maintain a basic standard of living, such as:
Debt repayment also could go on this list, since paying down debts on time is critical for maintaining a good credit score. So if you have any nondeductible debt such as car loans or credit card debt, you’d add those here as well.
Make a second list of variable expenses, including discretionary spending. This list may include things such as:
- Hobbies and entertainment
- Personal care or self-care
- Dining out
You also may want to make a third list if you have irregular expenses that you don’t pay every month. For example, these might include car insurance premiums you pay annually. Factoring those expenses in means you’re not surprised once those bills come due.
The key is to put every expense in your budget into its own categories. Another way to think of it is like this: must-haves, need-to-haves and nice-to-haves.
#3 Eliminate Or Reduce Nice-To-Haves
If you’re in disaster or emergency budgeting mode, prioritising your expenses matters. For example, paying the rent or your mortgage and keeping the lights on should naturally take precedence over buying new clothes.
Some of the extras you may be able to immediately cut from your budget include:
- Dining out
- Extra-curriculars for children
- Electronics and gadgets
- Gym memberships
- Unnecessary subscriptions
Ordinarily, removing these things from your budget might be painful. But if being diligent about social distancing and staying home, then cutting out these expenses may be less of an ordeal.
Another nice-to-have expense category to cut is anything that’s outsourced. For example, if you pay someone for lawn care or dry cleaning, those are expenses you could temporarily put on pause. The goal is to trim as much of the fat as possible from your budget to preserve as much of your income and savings as possible.
#4 Revisit Your Essential Spending
Once you’ve cut the fluff out of your budget, you can take a second look at your essential spending.
Start with what’s likely your biggest expense, which is housing. If you’re a homeowner and have an outstanding mortgage and you’re concerned about falling behind on payments, don’t hesitate to reach out to your lender. They can walk you through what your options are, if any, for reducing or suspending your mortgage payments temporarily.
Something else to consider: refinancing your home loan. With mortgage loan rates at or nearing historic lows, you may have an opportunity to refinance your mortgage at a lower rate. If that results in a lower payment, that could save you money on housing costs. Keep in mind that refinancing may result in break costs if you have fixed your loan, best to speak to your mortgage adviser.
If you rent instead of own, your options for managing rent payments may be narrower. But the good news is that the government has enacted an act to protect tenants from evictions. Ideally, you should continue paying rent on time each month. But if you can’t because your income has taken a hard hit, you may be insulated from legal action, at least in the short term. In that situation, it’s probably best to speak to your landlord and come to some agreement like deferring the payment or reducing the rent temporarily.
Most people probably find themselves with more time on their hands, this might be the best time to look for a better deal when it comes to utilities. There are plenty of comparison sites available online which could shave a few dollars off your quarterly bills.
Also, pay attention to what you can do to make your debt load more manageable when cash is short. If you have high-interest non-deductible debt such as credit cards then maybe an option is to consolidate this into a lower rate personal loan to zero-interest balance transfer card to help minimise interest expense.
SMART STEPS FOR INVESTORS
#1 Build A Pile Of Cash
This may not sound sexy but it’s the sensible thing to do. There is quite a bit of uncertainty in this current economic environment and having ample emergency funds over the next few months can mean peace of mind knowing that you’ll be able to take care of expenses for a while if something goes wrong. You may even be presented with an investment opportunity as assets become ‘cheap’ and having cash savings means you’ll be in a position to take advantage of the situation.
#2 Put Money Away For Your Retirement
You may find yourself in a unique position where being 'locked down' has meant that you’re not allocating you cash flow to discretionary spending like eating out, entertainment and travel. Why not consider growing your superannuation so that you have less money worries when you retire. Depending on your situation you may be entitled to a tax deduction and you’ll be investing your cash in an environment that is tax-friendly, potentially growing your wealth further.
#3 Start An Investment Portfolio
While saving and investing may sound like the same thing to some, investing means putting your money to work to potentially earn a better return over the longer term. Financial markets have recently had a correction in the past few months which has allowed some investors to purchase some assets at significant low valuations. However, 'cheap' assets don’t necessarily mean a quality investment. By working with your financial adviser, now might be a time to consider building a portfolio of quality investments as one way to help you get ahead financially and achieve your long term goals.
OR IF YOU HAVE A PORTFOLIO OF ASSETS
#1 Don’t Sell At The Bottom
When we hear day-after-day about falls in share values, it’s extremely tempting to sell out. In fact, it can take nerves of steel to hang in. But hanging in makes a lot of sense. Covid-19 may be a new bug, but since 2000 we’ve seen a number of serious viral outbreaks. SARS (2002), MERS (2012), and Swine flu (2009) have each had a negative impact on global equity markets. But once the virus subsided – as it did in every case, markets took off. The catch, is that to enjoy the lion’s share of the gains, you had to be in the market.
#2 Consider Portfolio Re-balancing
It may seem counter-intuitive but now can be a good time to rebalance your portfolio. Rebalancing means selling one type of investment and buying others so that you maintain your preferred weightings across different asset classes. This ensures that your portfolio continues to reflect your goals and tolerance for risk. Australian shares have dropped 22% in the last month. Red ink has been spilled across the market, and while some sectors have fared better than others, it’s likely that your asset allocation is completely out of whack.
#3 Embrace Dollar-Cost Averaging
The beauty of re-balancing is that it encourages us to buy low and sell high, and shares and exchange-traded funds are offering exceptional value right now. It’s understandable that you may not feel confident tipping a chunk of cash into the market at present. The solution can be dollar-cost averaging – steadily drip-feeding your money into the market by investing a set amount each fortnight, month or quarter. It’s a great way to hedge your portfolio against market ups and downs. As always, watch the fees you’re paying on investments. This is one aspect of your portfolio you have complete control over regardless of market conditions.