What has coronavirus taught us about our finances?
As well as learning how to bake banana bread, holding birthday parties on Zoom and finally getting around to writing that screenplay (ahem), we’ve also found out a few things about our finances during the pandemic.
The main takeaway for many is that we don’t need all those fancy slushy coffees as much as we need easy access to good, simple food, shelter, medical care and the kindness and co–operation of the people around us. This realisation has made lots of Australians pare down their spending and some or all of the expensive fripperies that may have had them shaking their heads over each bank statement.
Life may return to “normal”, but some changes should stay
While we’ve all learned to appreciate the things that really count, such as good friends, family and even a little bit of introspection, our busy lives will resume bit by bit over the next few months. Those coffees will creep back in, we’ll meet up with friends for drinks and maybe even hit up some sales.
Some of the changes the pandemic has wrought upon our financial thinking will become permanent and quite rightly, too. Here’s the big lessons covid-19 has taught us.
Everyone needs an emergency fund
Too many Aussies scraped by each month in the knowledge that they’d get another pay check and that they’d start that savings campaign after Christmas, next month, when they turned 30…
Suddenly, they lost some or all of their work hours. Self–employed and sole traders lost clients or were unable to work at all if they had to shield or worked in fields like hairdressing.
Thankfully the government devised a comprehensive financial aid programme that helped most of the people who needed it. Banks and lenders stepped up too, offering mortgage and loan holidays among other schemes. The feeling of having the financial rug pulled out from under their feet was a massive wake–up call to many Australians, however, especially those with no savings buffer.
A high–interest savings account is one of the best ways to build up that comforting buffer. You should aim to have at least three months of living expenses, with longer being more desirable.
Another option for the longer term is to switch to a mortgage that allows overpayments and redraws on those overpayments. You’re not only reducing your interest burden over time by chipping away at the principal of the home loan, but you can get hold of the extra money within 24 hours with some products.
Don’t forget about good old cash
It’s good to have a balanced portfolio, with your shares spread out among lots of different sectors and commodities. However, if you need to free up money in a hurry, you often end up selling some stocks. If everyone else is doing the same then you’ll have to sell cheaply and you’ll lose both the value they had built up and any chance of regaining it.
Having some cash stashed away in an at–call saver account or even a transaction account is a good way to cover your expenses without affecting your investments.
Bricks–and–mortar investment isn’t 100 per cent safe
For many investment landlords, the coronavirus pandemic caused concern because their tenants were unable to pay their rent due to having lost work. Lots of landlords offered discounted rents or even rent holidays if they could, but it was still a worrying time for them and for their tenants.
Most of the nation’s banks and mortgage providers offered payment pauses for investment mortgages as well as for residential home loans, which eased the problems somewhat. However, confidence in buy–to–let property has been shaken as the virus showed that even this fairly solid investment sector wasn’t invulnerable.
In times of national – if not global – crisis, you can’t rely on rental income. Your current tenants might find it hard to pay all of their rent and there’s no guarantee that you’ll be able to find ones who can, if everyone’s affected. The answer is to make sure you have an affordable investment mortgage that can offer payment pauses or interest–only periods if necessary.
There’s no job that’s 100 per cent secure or certain
The coronavirus pandemic has affected pretty much every sector and industry. Even relative safeholds like tourism and hospitality have been badly affected due to travel restrictions, with office and factory workers also being stood down.
If you can’t totally rely on your job to see you through turbulent times, then you have to make sure your expenses are as low as possible and that you keep growing that all–important buffer.
By reviewing your bills, personal and home loans as well as your credit card deals, you can reduce your monthly outgoings so that you don’t have such a steep mountain to climb during times of reduced income.
If you found, for example, that you lost 15 per cent of your income due to covid-19, you may not have qualified for governmental aid as the threshold is 20 per cent of your income. A reduction of 15 per cent, while not welcome, may still be still workable if your outgoings are low or if you can lower them further.
This is why reviewing your financial products at least once a year – and certainly during tough times – is important if you’re to withstand the sudden shocks that life has shown it can throw at us.