The 7 big money questions asked during COVID
The coronavirus pandemic has raised many questions around finance and money. But some questions still remain unanswered. These are the seven most frequently asked questions, and these responses may help you navigate your finances.
How can I create an emergency fund?
Everyone needs an emergency fund in times of emergency, and there are several ways to create one even if your income is under pressure.
The first step is to understand all your incomings and outgoings, and then have a really good look at the outgoings.
Most of us leak money from things we have signed up to, subscriptions to streaming services for example or overly expensive phone plans.
Make a list of really non-essential expenses and either eliminate or reduce them.
Look at your food budget, and that old chestnut of the takeaway coffee. Do you really need two a day, and perhaps you’d do better cooking a cheap pasta meal instead of splurging on that takeaway?
So work out what you can save out of your existing expenses, and then create a separate account and make regular deposits based on your budgeting cycle, either weekly or monthly.
And don’t touch that fund, unless you really have to of course.
Can I recession-proof my finances?
Yes, you can! The emergency fund you have already begun to create is a good start, but there are also some other things you can put in place.
Have a good look at your debts. Can you pay any of them down or even look to consolidate them?
If you have a couple of credit cards you might be paying close to 20 percent interest on them. See if you can get a personal loan at much lower interest and consolidate your debts.
There are also quite a few balance transfer credit card deals in the market at the moment, where you can effectively freeze some of your debt for up to two years if you manage it well.
Then, get hustling! Have a garage sale or list some things of value, and which you don’t use, for sale online and save that money. Can you list any of the space in your home to rent on Airbnb or Spacely?
And think about other income streams, even in the gig economy to tide you over.
One thing not to do – go to a pay day lender. It will be a recipe for disaster and you’ll have your own personal recession on your hands, one that could last for years.
Should I cancel my insurance?
In a word, no!
If there’s any time you might need insurance its at a time of volatility and risk.
If you have been paying for income protection insurance, for example, this is the time when you actually might need it, on the proverbial rainy day.
But it might be worthwhile to review all your insurances and make sure they are appropriate, and that you are paying the most cost effective premium.
There’s also the chance you might be doubling up on some insurance and not knowing it.
Many people have life insurance inside of their superannuation funds, and might also have another life policy.
So stay insured, but run an audit to make sure you are covered for the right things, and at the best price.
Should I take a repayment holiday?
Many banks are offering repayment holidays to mortgage holders and some renters have moratoriums in place during COVID.
Everyone’s situation is different, and for many people these holidays have ensured they keep a roof over their heads.
It is worth remembering, however, that even though you might defer the mortgage the interest is still capitalising away.
This means that you are still accruing interest debt to the bank. Your debt has not been frozen at the level it was at when the repayment holiday began.
In reality, these repayment holidays are simply kicking debt down the road to be paid later.
That might be acceptable if you are struggling to survive right now, but just remember it’ll all catch up with you eventually, hopefully when your finances are more secure.
Should I access my super early?
As part of its COVID response, the Government is allowing people to take out a maximum of $20,000 from their super accounts.
Once again, everyone’s situation is different. If this money from your super is the only way you can pay the mortgage or the rent and put food on the table, then it’s a no-brainer and you have to do it.
What you don’t want to do is fritter away your hard earned super on dinners, clothes or personal grooming, even if it feels good and lifts your spirits right now.
Remember that in taking out your super early you are looking after the present and sacrificing a little bit of your future.
That means that you should really have a plan on how to make up your super balance in the near future so you don’t miss out on the compounding interest which can deliver you a decent balance on retirement.
Should put retirement on hold?
In the first days of the pandemic in March, sharemarkets around the world slumped and along with them the super balances of most ordinary Australians.
This led to a panic where many people rushed for the exits and sold out of equities and put their money in cash, expecting another event like Black Monday in 1987 or the Global Financial Crisis.
The reality is, however, that since then markets have rebounded strongly, with key US market indices setting a series of new records.
In many cases, super balances have corrected themselves and now back on track.
Residential housing prices, another key source of wealth to average Australians, have held up, even though there are always dire predictions of a crash just around the corner.
That doesn’t answer the question on retirement plans, however. It is impossible to deliver an answer for everyone, but at this point most people’s retirement trajectories should still be on track.
What happens in 2021, when Government assistance ends and if the pandemic continues, is the unknown risk and this is why the answer to the retirement question lies in the answer to many of the questions posed above.
If you can insulate yourself well enough against recession, and keep your super balance healthy, then that retirement you planned should still be attainable.
What happens if I lose my job?
Over 2 million people are relying on additional income support from the Federal Government and this is masking the true unemployment level which, although it is officially at 7.5 percent, is actually much higher.
If you do lose your job, get on the front foot and understand your entitlements.
If your employer is not prepared to apply for the JobKeeper payment, which will keep you on the books, then make sure you get your full redundancy entitlements and contact Centrelink immediately about the JobSeeker allowance.
Once you get some clarity on your situation then you can start budgeting, and can implement some of the other strategies around saving money for survival.
Look forward to the future and think about whether you are likely to get the same kind of work in the future, or if you need a career switch and need to re-skill or up-skill.
There is also evidence that the number of start-up businesses is increasing during COVID, as many people re-invent themselves as entrepreneurs to survive in a very different future labour market.
If you’ve always wanted to create that brilliant business idea, now might be the right time to revisit it, but if you do that keep your costs low and go for the minimal viable product rather than spend too much of your own valuable capital.