The do’s and don’ts of bolstering your financial resilience

While we are all trying to cope with the impact of COVID-19 on our physical and mental health, the virus is also wreaking havoc on our economy and our hip pockets

Even before the pandemic, more than two million Australians were experiencing ongoing financial stress and about half of working households had less than $A7,000 dollars of cash in the bank.

The groups most affected by financial stress are singles; in particular, single parents (who are mostly women) and renters, who are particularly exposed to housing stress.

As the economy is affected by the restrictions around COVID-19, the number of Australians experiencing financial stress is now likely to rise sharply.

Our financial wellbeing

Financial wellbeing is closely related to mental and physical wellbeing.

Mortgage foreclosures and rising unemployment have been linked to increased levels of depression and anxiety. And while, understandably, our fears about physical health and mortality are tightly linked to the spread of COVID-19, economic and financial crises are also associated with an increase in suicide rates, child maltreatment and intimate partner violence.

Negative wealth shocks have been shown to increase overall mortality, particularly if they involve a loss of the primary residence.

That’s why, just as it is critical that we look after our physical and mental wellbeing during this crisis, it is also imperative that we look after our financial health.

While the Federal Government has stepped in to offer income support for some who need it, there are also steps Australians can take on a personal level to bolster their financial resilience as the pandemic unfolds.

Create or update your budget

Never underestimate the power of having a clear budget, listing expected income and expenses, including irregular expenses, over the next few months to a year.

Your budget during times of crisis is likely to look significantly different to how it would in usual circumstances. You may need to be more conservative in estimating expected income in light of potential pay-cuts and job-losses, and expenses may also need to be reduced where possible.

In particular, look out for unexpected cash shortfalls, that is, dates where income isn’t sufficient to meet financial obligations when they are due.

It’s worth looking at the Australian Securities and Investments Commission’s Moneysmart website, which provides useful tips and an easy-to-use tool for budgeting.

Identify financial emergencies

If you identify a potential financial emergency in your budget, it’s important to develop possible solutions quickly.

One way to mitigate an upcoming cash shortage is a reduction in or deferral of expenses like bills or mortgage payments.

Many utility companies and banks provide hardship options that allow people to rearrange their payments in order to deal with financial problems.

Another option is to look at ways to increase income.

The Australian government is opening up different sources of financial support like the JobSeeker and JobKeeper allowances. The Moneysmart website has some valuable information on the range of financial support government is providing.

If these aren’t an option, and you have other assets like investments, it could be the time to sell them to get through a challenging time.

Monitor your spending and set spending limits

As we continue to stay home, many shops and retailers are only accepting electronic payments and others have moved completely online. This means that people will now spend almost all of their money electronically.

Interestingly, a recent MIT study found that people are willing to pay twice as much for a product when paying by credit card compared to cash buyers.

And research into mobile payments in China showed that switching to mobile payments leads to more shopping overall and more hedonistic shopping – like buying food, entertainment and travel.

With that in mind, it’s important to monitor your electronic spending regularly, perhaps even daily, using a mobile banking app, and make sure you set spending limits.

Avoid taking on high-cost debt

One potential way to plug a shortfall in cash is credit – a misleading term that actually refers to putting yourself in debt.

Anyone looking at using debt to tackle financial emergencies must take a lot of care. The use of debt is particularly problematic when it is used to pay for consumption goods, like groceries, or to pay interest on another debt.

Particularly problematic forms of debt are credit card debt and payday loans. These types of debt can appear attractive because of the ease with which they can be accessed – but you will pay an expensive price for the initial convenience.

When using a credit card, always pay down the entire balance by the due date in order to avoid incurring interest, which is typically charged at high rates.

People experiencing a financial emergency who need to raise funds through debt should consider alternative forms of debt like no-interest loan schemes, but it’s important they to get advice from their bank or organisations like the National Debt Helpline.

More information is also available on websites like Moneysmart.

Build an emergency fund

If possible, you should use any cash surplus to build and maintain an emergency fund – an amount of cash that can cover at least three months’ worth of your household’s essential expenses.

A fund like this can provide important protection against an unexpected financial shock. You can use a savings goal calculator to work out how much you have to put aside in order to achieve a desired savings goal in a given period of time.

Check your insurance coverage

Households should also make sure they have sufficient insurance cover to avoid additional financial stress as a result of any other unexpected events.

This may include sufficient home and home contents insurance, car insurance, health insurance and income protection insurance.

Avoid scams and costly mistakes

Uncertain and stressful times are peak season for financial scammers.

Many scams have been doing the rounds during the COVID-19 crisis, including offers to access your superannuation or high-return investment opportunities. The Moneysmart website provides advice about how to detect scams and where to report them.

Many people are finding the current crisis highly stressful. And research has shown that acute stress can impair decision-making as it can limit people’s attention or keep them too focussed on the near future, which can lead to short-sighted decisions.

Other studies have shown that people tend to overreact to large financial shocks, which can lead to costly mistakes when making investment decisions.

In finance, individual decisions – whether they are decisions related to spending, debt or stock market investments – can easily and quickly lead to severe financial losses. At the same time, many financial decisions are complicated and require advanced skills and experience.

It is therefore very important for people to be extra careful when making decisions during periods of extreme stress. Seek professional advice where possible before making major financial commitments.

Longer-term planning and investments

Needless to say, the current financial crisis also presents formidable challenges for medium- and longer-term financial planning. This includes the decisions about whether to buy (or sell) a house and about your retirement funding.

Given the sharp downturn of financial markets, the value of most superannuation portfolios has decreased substantially, and this is particularly concerning for people who are either close to retirement or have already retired.

Investment decisions are often highly complicated and individual decisions, like switching a superannuation portfolio into cash, can have severe adverse consequences.

So do seek professional advice before making major investment decisions, either from your superannuation fund or a trusted financial adviser.

Create a will

This crisis presents a good opportunity to do a will or review an existing will.

People with dependents should ensure that their financial affairs are ‘in order’ to avoid unnecessary legal complications and financial burden on their dependents.

Seek help

At the moment, many people may be feeling overwhelmed when it comes to money – it’s ok to ask for support.

For information on handling everyday finances, the Moneysmart website provides a lot of useful information.

If you are experiencing a financial emergency like an inability to meet financial obligations, you can find useful information on websites like MoneyHelp, but also seek advice from a financial counsellor either through the National Debt Helpline or a community financial counselling organisation such as the Consumer Action Law Centre.

If you are experiencing psychological stress, consider contacting one of the national counselling helplines.

You can get more information about Professor Carsten Murawski’s FinFuture White Paper on the FinFuture website.

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