As we work through the economic fallout from COVID-19, it’s natural to be jittery about your financial position. While market volatility and employment uncertainty can be disconcerting, there are some behaviours you can adopt to help build financial resilience.
Ensure you have good financial hygiene
When your income is reduced or uncertain, having any type of debt is scary. While debts such a mortgage, car or HECS-HELP debt are more fixed in nature, it’s a good idea to evaluate any incidental debt you have incurred to see if you can gain any efficiencies or clear the decks.
HLB Mann Judd partner Michael Hutton says “Good financial hygiene is important at any time, but especially now. It also makes sense not to have much in the way of credit card debt and now, with interest rates so low, it’s a good strategy to pay off any cards if you have the cash to do so.”
Make sure you know exactly how much you’re paying out in loan repayments and consider consolidating your loans into the one loan with the lowest interest rate. You could also consider contacting your bank to see if you can negotiate a better deal.
Reduce your spending and bolster your reserves
It may seem obvious, but the less you spend, the more you have. “Spending less is particularly helpful during a time when portfolios are challenged,” Hutton says.
One way to reduce spending is to work out a budget and identify where your money is going and where you can cut costs. It’s always a good idea to regularly check in with your service providers, such as utilities, telecoms and insurance to see if you can get a better deal, but it definitely makes a lot of sense now. Saving a bit here and there could help you to build or grow a cash reserve in case of a rainy day.
Similarly, access to more liquid investments can act as an important buffer. “Hopefully, people who have seen their income fall - perhaps as a result of redundancy or reduced working hours - have investments outside super they can cash in if they need money. Liquidity and accessibility to money is so important. You need to be able to cash in investments if you require it,” says Hutton.
However, it’s important not to confuse access to liquid assets with converting your entire portfolio to cash – diversification is key.
Avoid emotional financial decisions
Those who remember the global financial crisis will recall stories of people panicking and selling out of their investments only to lose out when the recovery began. Hutton says now is not the time to make any knee-jerk emotional decisions.
“One key mistake is trying to time the market but in these volatile times, the market can rise dramatically one day and fall by the same amount the next,” he says. “And if the market is going to rise – as it did recently by 7 per cent in a day – then these are days you don’t want to miss out on.”
He says as long as you have good assets and are diversified, the best thing to do is to sit tight and let your investment strategy do its stuff. “Over time things will rebound.”
Hutton adds that history shows over time the market does go up after downturns. “Although I understand this is a hard message to hear when it is all doom and gloom. But good companies will usually continue to be good companies.”
Empower yourself with knowledge
Knowing what assets you have, how they’re invested and how they’re performing is always wise, but it’s especially so when times are uncertain.
“While educating yourself about your investments is always recommended,” Hutton says, “with the extra time many of us have now, it’s a good idea to ensure you know exactly what investments you have and understand where your money is going.”
However, Hutton cautions against going it alone with and making risky investments, “Don’t get too fancy with your investment strategy. Some people may be considering investments to short the market or are looking to get into speculative assets but unless you know what you’re doing it’s best to steer clear of these strategies,” he says. “A good well-thought-out strategy will always hold up in the long term over choosing get-rich-quick schemes.”
Understanding your financial position also includes understanding the options available to you should you need them. The federal government has introduced some temporary initiatives to help at this time, including tax concessions for small businesses, changes to minimum drawdown rates for pensioners and changes to social security benefits. You can find out more about them here.
It’s important to remember that accessing some of the government measures could have long-term financial implications (for example early access to super) and others are temporary in nature (for example JobKeeper) – so it could be wise to consider other options.
Exploring your options could mean finding alternative income streams to generate extra cash or to help bridge the gap between jobs. You could also think about investing in yourself by learning a new skill to improve your income-earning potential.
Making good financial decisions isn’t always easy – particularly in the face of so much uncertainty. A financial adviser can answer any questions or concerns you have about your investments. They will be able to help you balance your short term needs with your long-term goals, which may help alleviate any concern COVID-19 may be causing you.
For those nearing retirement, there may actually be positives to a temporary loss in account value. For example, if you were about to start a super pension and were over the $1.6 million threshold (known as the transfer balance cap – or amount you can transfer from super to a super pension), you may now find you are under it. Generally, the investment returns within these pensions are tax free. While perhaps counterintuitive on the surface, this could be a good thing. Once the transfer to pension has occurred, if the markets (and the value of your investments) recover, any future investment returns will remain in the tax-free pension.
In your conversation with your adviser, you can evaluate your goals, immediate needs, level of risk tolerance and time horizon, and decide together if changes to your investment strategy are necessary.
There’s no time like the present
The environment is likely to remain uncertain over the next few months, so now’s the time to implement some good financial behaviours. If you have any questions about your investments or super, or your circumstances have changed, contact your financial adviser. You can also keep on top of your OnePath super and investments by logging into or registering for My OnePath.
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