Coronavirus and handling your Personal Financial Crisis
The Coronavirus Health Crisis is also rapidly morphing into a Personal Financial Crisis for many people. It is seriously scary out there. We are almost certainly heading for our first economic recession in 29 years.
But a generation of Aussies have no idea what that means. No Australian under the age of 47 has experienced an economic recession as a responsible adult.
Overnight was the biggest one-day fall on the US sharemarket since the Crash of 1987.
In the last month the sharemarket has lost 30 per cent of its value.
That means your superannuation has dropped close to that as well… in a month.
The Reserve Bank is about to cut official interest rates two weeks after the last cut. The Federal Government is set to unveil a second major economic stimulus package…10 days after the last one which hasn’t been enough.
We’ve locked our borders, mass retrenchments are set to follow, and the unemployment rate will skyrocket, as businesses shed staff as the health lockdown throttles sales.
It is time to get prepared.
An economic recession, and the personal financial crisis it triggers, can be so debilitating across your entire being. It can feel as though your whole life is about to come crashing down like a house of cards. It puts enormous pressure on relationships and your ability to function.
You frankly don’t wish this on anyone.
So here’s my seven-step guide on how to handle a PFC, to survive a Recession and turn things around as quickly as possible.
1. Understand the big picture
Before anything else, draw up a list of all your assets and debts to get a bird’s eye view of where you’re at financially. Then, build a budget to work out where your money actually goes.
It’s simple to do. In one column list your income and in another pull together all of your regular and irregular monthly expenses.
Run a fine-toothed comb through last month’s receipts and bank statements to make sure you’ve listed expenses accurately.
2. Set smart financial goals
If you’re in a sticky financial situation, your main goal is probably to get out of it as quickly as possible, which is perfectly reasonable.
But it’s not a good financial goal.
A good financial goal has a definite deadline and can be broken down into smaller, more manageable steps
For example, it’s much better to say, “I want to get rid of my credit card debt by June, which means I need to repay $150 a week for the next three months.”
Or “I need to find $500 a month to live on now.”
3. Take control of your spending…
With a budget and some well-defined goals to work towards, it’s time to take control.
Think about your spending in terms of wants and needs. Needs are non-negotiable, for example you’ll always need to make room in your budget for groceries.
Wants are nice to haves such as gym memberships, new clothes or eating out, and if you’re in the midst of a PFC these should be the first things to go.
4. … And your debts
First, look at whether you can minimise the interest you’re paying. For example through a credit card balance transfer or by consolidating multiple debts to reduce the overall interest you pay.
And in this era of intense banking competition look for better deals from the new breed of digital lenders and don’t be afraid to negotiate a better interest rate on your existing loans. Ring the bank up and ask for a discount.
Go to www.getcreditscore.com.au, find out your credit score then either go to your bank and get a better deal on consolidating debts into a personal loan or use an alternative like a peer-to-peer lender.
Next, try to channel all of your additional money into making extra repayments, which will save interest and help you pay off the debts faster. On many home loans you redraw those extra payments if you need the cash for an emergency in the future.
(A quick note: Don’t be afraid to use your savings to make extra repayments. Money in the bank only earns around one per cent these days, while credit cards or personal loans still charge interest rates in the double digits.)
Finally, if you’re having trouble repaying a debt or bill, speak to your lender or biller immediately. They may be willing to negotiate more favourable terms and you could avoid a black mark on your credit report.
5. … and your insurances
Make sure to do a full review of your insurances, both for your things (think home, contents and car for starters) and for you and your family (life, income protection, health insurance and total and permanent disability).
and see whether you’re getting the best deal. If not, ring your provider to see if they’ll match the best deal you’ve found… otherwise switch.
6. Don’t go it alone
If you’re drowning in debt or simply don’t see a way out, there is help available.
Financial counselling is a free service provided by many organisations and is aimed at helping you get back in control of your money.
Contact Financial Counselling Australia (www.financialcounsellingaustralia.org.au) to find a counsellor near you.
7. Plan for the next PFC
Hopefully, the steps I’ve outlined help you take control and get through your PFC (and improve daily financial habits too).
But a PFC could happen again, so make sure you’re prepared.
Start setting aside money in an emergency account for the purpose of covering unexpected expenses.
This will ensure you can weather the next PFC if it comes along.
4 things you can do right now to save money:
1. If you can’t pay your outstanding credit card balance, transfer the amount to a new credit card offering 0% interest. Remember this 0% interest rate offer will only last for a fixed period (12-24 months) on that transferred balance, but it could give you a financial breather to get through tough times.
Just be careful once the offer ends, or you make new purchases on the card, that the normal interest rate and fees are reasonable.
2. Go to the comparison sites I’ve listed above and compare your loans and insurances with others in the market. If you find a better deal ask your provider to match it or take your business elsewhere. You can save up to $6,000 a year in repayments by switching from a Big Four bank variable home loan to the lowest rate home loan on the market.
There’s a $600 per year premium difference between the highest and lowest priced health insurance policies.
3. Do that household budget now. List expenses, categorise them into essential and non-essential, look what you can cut of the latter.
4. What extra cash can you earn? Is there a casual job you can earn extra bucks… Coles supermarkets, for example, are employing an extra 5000 casuals right now. Do you have talents you can hire out (cooking, music teacher, tutoring, household jobs etc). Have a garage sale and sell your junk for cash.