How to take stock of your finances
during a lockdown
“Never let a good crisis go to waste” – Winston Churchill
“Never let a good crisis go to waste” – Winston Churchill
Though we may not be in wartimes the principles of this saying are ever green. How is it that a crisis can be good when the news is mostly negative? It is because times like this present an opportunity to overcome the challenges in front of us and take stock of what is truly essential. All crises fade, so it’s important to reflect on how we deal with an opportunity like this to carry us through for the years to come.
Most households across the nation have had their incomes affected by COVID-19. This is true for employees, business owners and property investors. However, we do have some control over how this impacts our cashflow. In my previous post, I’ve gone over what can be done to a loan structure to manage your cashflow, so I’ll seek to cover alternatives today.
Managing a household isn’t too dissimilar to running a business. Let’s take AIR NZ as an example of what they’re doing to take stock. Firstly, they already had a contingency fund in place to weather a potential drop in income – however, it wasn’t enough to take on a challenge such as COVID-19 where their income dropped so substantially. This has been a genuine shock, however their existing contingency funds bought them time. Secondly, they have a massive need to review their expenses as for where the airline is headed now there will be many divisions, contracts and teams that will not be needed anymore – it’s tragic that 30% of their workforce will lose their jobs, however, that’s better than an alternative where 100% lose their jobs if they do nothing about this. Finally, they are looking at their income streams and identifying what they still can do and will likely need to do as they come out of the crisis. In this case, simply looking to increase income is hopelessly ineffective when reality has struck.
How does this relate to your household?
1. Contingency Funds
Irrespective of what it looks like today, it’s good practice to have set aside 3 months of your expenses if you are a salaried employee, and/or 6 months of your expenses if you are self-employed, or have a large proportion of your income derived from commission. This could be in an account linked to your offset loan, a separate line of credit, or in a savings/call account at another financial institution. COVID-19 has shown us how important it is to have something like this in place – it’s an event that had taken the vast majority by surprise and having a contingency in place gives security to weather a storm.
TIP: If you don’t have a contingency in place, consider setting up an automatic payment as part of your budget on the same day as your mortgage payment or payday until it reaches the desired amount. This fund cannot be used for investment or spending and is effectively an insurance policy to protect your cashflow.
2. Review your Expenses
We normally like to work on how to increase your income to build wealth, however, it’s also important to look at what is left over so you can invest it in the first place! This also isn’t about cutting the costs so low that you’re not motivated to provide, as lockdown is a great opportunity to assess what is truly essential for your household. Review your last 3 months of your expenses and line by line discuss each expense with your partner. Perhaps there are subscriptions you don’t use, unnecessary fees you might be paying or bought things that you don’t need? The lower your household expenses the lower your contingency fund needs to be. Every household is different, and everyone wants the best for their families – therefore, it should be a family exercise to assess what is truly essential for your household. If you can’t lower your expenses any further, then you’ll need re-assess your income streams instead.
TIP #1: There has been a general rise in the amount of subscriptions people pay for – list these out and assess how often these are used. Major expense categories to assess are; dining out, groceries and transportation (including vehicle depreciation).
TIP #2: Insurance may seem like an easy expense to cut, however, it’s there for a reason. So review your insurance plan with your insurance adviser and if your income has been impacted by COVID-19 you may be eligible for a repayment waiver. If you don’t have an insurance adviser, let us know and we can introduce you to a fantastic one!
TIP #3: List out all the things you want to buy, whether these are cars, furniture, hobby items etc. and rank them by priority with a dollar value assigned. Essentially, the idea behind this is that you can buy everything on the list, but funds need to be assigned from your regular income to buy these. Create an ‘aspirational’ account for all these high-ticket items so they don’t catch your budget off guard. If you’re working on developing a habit or have other goals, you can link them to the aspirational goals for an extra kick of motivation.
3. Review your Income Streams
List out all your combined household income and assess whether the income coming in is enough to cover your household and lifestyle expenses to check if there is a surplus/deficit. This will also help identify how much ‘passive income’ is required to become financially independent. Note, the lower the expense base, the faster you’ll achieve financial independence. If there is a deficit, go back to reviewing expenses as that will be the fastest way to fix the deficit, however, for everyone else it’s always worthwhile reviewing how to increase income. This could be so you can build your contingency fund faster, purchase your aspirational items faster, give back to your community more or to invest. In general, you want to have as many income streams as possible to reduce your risk.
Questions to ask yourself: Do you have a career plan, and if so, what is the income trajectory? How can you invest in yourself and your education to increase your income? Could you invest your time to start a side hustle? Is contracting at a higher rate work in your profession? How much are you setting aside to build equity for a deposit for another property?
We each have different hurdles in front of us, some will be focusing on how to keep their business afloat and others on concerns around their job security at this time. Although it’s tempting to take advantage of opportunities that may be coming up – remember to focus on what the most important thing to your household is right now. This is no doubt a stressful time, especially If you’re a business owner, the governments business guarantee scheme has come into force now so contact your bank to arrange solutions to fund your working capital. If you’re an investor and your tenants are struggling with their rent, work with them to find a solution and remember worst case, you have the option to re-structure your loans.
Once you have overcome what’s immediately in front of you, realise there will be opportunities over the next few years. With lower interest rates and potentially impacted property values in tourism cities and commercial property sectors there may be opportunities to be had. It’s essential for investors who can – to step up and provide liquidity. Without investment confidence in the market drops and values may drop even further. This isn’t good for stability across not just the local but national economy as well.
Fortune favours the bold as they say, so what are you doing now to prepare?
Wishing you all the best during the final stretch of this lock-down period, stay safe and keep well!