With Coronavirus risk mitigation measures ramping up it’s getting pretty rough out there at the moment and my heart goes out to anyone who is doing it tough. I wanted to take a moment to offer some tips and general advice when it comes to hunkering down in a crisis.
When it comes to preparing for lockdown or a break in employment obviously some big changes might be necessary – some changes are quick and easy, some are bigger and more complicated, and some may expose you to risk so they are really important to consider properly before taking action. It’s not an exhaustive list, but here are some of the things you may wish to consider.
— USE YOUR ENTITLEMENTS:
The government has announced a raft of support measures for small businesses, sole traders, and individuals. Find out what you’re entitled to and get cracking on applications.
REACH OUT TO YOUR ADVISERS:
If you’re a business your Accountant should have their finger on the pulse of the stimulus measures announced by the federal government. Shaun & James from CHG have been on the front foot and compiled some great information on the Facebook COVID-19 Business support group. If your query is personal in nature, reach out to the CHG Wealth team and we’ll do our best to assist where possible.
CUT UNNECESSARY EXPENSES:
This is an action that will serve you well in normal times, but in a crisis it’s an absolute must:
- Subscriptions you forgot about
- Unused bank accounts that continue get hit with a monthly fee
- Unused/unneeded credit cards with an annual fee
- Wine memberships where you forget to cancel the next delivery and it just shows up when you didn’t really want it.
These things need to go first. You can always turn them on again when things return to normal. Or… you when the coast is clear you can grab that extra cash flow and direct it toward wealth-building initiatives!
COMPARE THE MARKET:
There are often significant savings that can be found by reviewing core expenses such as:
- Utility bills (Elec & Gas)
- Car Insurance
- Home & Contents Insurance
- Health Insurance
- Landlord Insurance
- Pet Insurance
- Roadside Assist
It’s important to ensure your family remains protected, so most of these need to stay, but check your options to make savings where possible.
DOWNGRADE EXPENSES:
Some expenses you need to keep, but there might be wriggle room for savings:
- Mobile phone plans for more data than you need
- Internet plans for unlimited NBN when you only use 100GB p/m (login to your account and check your usage)
- Unused Foxtel / cable channels
- Scotch fillet gets downgraded to Rump steak, Organic to standard etc etc.
- Waste not want not – hoarding veggies and then throwing out the rotten ones a week later isn’t helping you.
DON’T PAY BILLS TILL THEY’RE DUE.
Some people pay their council rates or their utilities weekly – a small payment every week so that when their bill falls due its already paid for. Stop doing it – that money should be in your account until you have to part with it. You can still maintain the same discipline of allowing it to accrue $30.00 or $40.00 p/w at a time (or whatever the amount is), but at least you can access it in the event of an emergency, and at least its earning you or saving you interest while it’s in your account!
In addition, monthly repayments often cost more than a lump sum annual repayment. Pay yearly but accrue monthly in your own account! For other expenses that are chunky & non-negotiable (Car rego for example) you might want to register for 6-Months as opposed to 12-Months to pick up temporary cashflow relief.
HOME LOAN:
It’s always a good idea to have buffers in your loan – cash to redraw in an emergency. If you’ve been paying the same Principle & Interest repayment amount for the last 3 or 4 years and have benefited from the 5 rate cuts since 2016 your minimum repayment has been going down, but your overpayments may have been accruing in a redraw facility. Check if you have overpayments in your loan that you can access.
Alternatively, an overpaid loan may not need any repayments for you to continue to meet your minimum repayments. An overpaid loan might be able to just pay itself off for a while (talk to an expert before making decisions – your loan structure might not support this).
Finding cashflow savings:
Option 1: Move from Principle and Interest Repayments to Interest Only.
Most banks would prefer to receive part of something than all of nothing, so are likely to be accommodating for this request. As an example, a loan of $500,000 @ 2.89% interest over 30 years has a monthly repayment of $2,078 p/m. Changing to Interest Only at 3.21% reduces the monthly payment to $1,350 p/m – a cashflow saving of $728 p/m.
Option 2: Take a Repayment Holiday
The good news is that many banks are chipping in and allowing clients to take a 3-month “repayment holiday” on their mortgage payments. Given that this represents most people’s largest expense it can provide welcome relief, and an opportunity to redirect that expense to your core non-negotiable expenses like food & groceries.
Implications to be aware of:
It’s important to note that a ‘repayment holiday’ is not a waiver of the amount you owe, nor the interest you have to pay. During the ‘holiday’ period, your interest gets added to the loan balance, so you will have a higher loan balance to repay once we pull through this. Of course, given the circumstances, this might be totally worthwhile.
Option 3: Refinance and convert equity into cash
If you have a good credit standing and your job is secure, you may be able to refinance your home loan. This can have a few benefits:
- Equity can be converted to cash to increase buffers
- Extending the loan term can lower minimum repayments
- A lower rate will save you cashflow & interest.
Be aware that there are implications for all of these options so please speak to myself and the CHG Wealth team, or Eddie & the team from CHG Finance to discuss options & implications and find the right fit for you.
LAST RESORT OPTIONS:
Always go for the “low-hanging fruit” first, but if you have to find extra savings there might be a couple more options…
PERSONAL INSURANCES:
Personal insurances (Life Insurance, TPD, Income Protection, and Trauma) are extremely important so that your livelihood & your family are protected. However, if the cost is stressful there may be options:
- Make sure you’re not overinsured – if you haven’t reviewed your policies in a while come and see us. Being overinsured is expensive (but being underinsured might be dangerous) so come and see us to ensure the balance is right.
- Some income protection policies offer a pause on premiums if your employment is terminated.
- Waiting periods can be tinkered with to produce savings
- Some personal insurances can be paid from super relieving pressure on cashflow.
- Some policies allow insurance to be increased with “life events” to a temporary reduction in cover might be possible if you absolutely need to (without the risk of not being able to increase it again later)
Warning: When it comes to personal insurances the implications of the wrong decisions can be enormous. All of these possibilities might mean that cover cannot be reinstated, so please seek advice before making changes.
TRY NOT TO TOUCH YOUR SUPER!
Although the government has announced that Australians can access up to $10,000 from their super in 2020 & 20201, please use this as an absolute last resort. Why?
$10,000 today growing at 7% for 30 years turns into $76,123, and earning 8% it turns into $100,627. You’re going to need that $10,000 in the future, so please leave this option as a last resort.
Safe safe everyone, and look after each other. We’re all in this together.
Saul.