Five tips to survive a decline in income

Since precautionary measures were heightened to slow the spread of COVID-19, almost one million Australians have lost their jobs. According to the Australian Bureau of Statistics, Australia lost 7.5 per cent of its jobs between 14 March and 18 April. If you’re one of the many Australians who has lost their job, it’s understandable that you may be feeling stressed about managing your finances.

 

Put together a new budget

The first thing you need to do if your income has fallen is put together a new budget. With a reduction in your income, you’ll likely be looking to reduce your fixed and discretionary expenses. Put together a budget that includes your essential expenses such as your mortgage or rent payments, bills, and groceries. This is also a good time to assess which expenses you can do without until your income rises again.

 

Set up payment plans

Losing your source of income can be stressful, especially when you have ongoing payments to meet. If you’ve put together your new budget and you’re not sure if you’ll be able to meet your regular payments, speak to your mortgage lender and other providers about setting up a payment plan. The important thing is that you do this proactively and keep communication open as having these conversations now will put you in a much better place to negotiate.

 

See what support you may be entitled to

The government has announced a range of support packages available to people who have lost their source of income or have had their income significantly reduced. Check which support you may be eligible to receive and organise all of the details you need to apply. Full details about the Federal Government’s measures to support individuals and businesses are available on the Treasury website.

If you’ve lost your income due to illness or injury and you have income protection insurance, check what claims you are eligible to make and what payments may be available to you.

 

Identify potential savings

When you put together your new budget, you probably identified expenses you could do without such as gym memberships and other discretionary expenses. To identify further savings, check if you can switch to cheaper providers for your utilities such as electricity, gas and internet and consider winding back your mortgage payments if you have been paying extra.

 

Seek advice from financial professionals

In stressful times, it can be hard to look beyond the current period of financial stress. However, this is also an opportune time to reset your financial plan for the future. Take this opportunity to speak with your financial professionals, including your mortgage lender or broker, accountant, and a financial adviser to manage your finances now and into the future effectively.

 

Moving forward

At a stressful time for people, it’s important that you don’t feel like you need to weather financial challenges alone. Taking the time to see what support may be available through the government’s support packages is a good place to start. And to set up a financial plan for the future that also addresses your current financial challenges, make sure you speak to a qualified financial professional for tailored advice.

What to consider when withdrawing your super early

As the COVID-19 virus took a sledgehammer to the economy, the federal government rapidly introduced a range of initiatives to help individuals who lost income as a result of the measures taken to control the virus.

One of those initiatives was to allow qualifying individuals access to a portion of their superannuation to help them meet their living costs. Withdrawals are tax free and don’t need to be included in tax returns. Most people can withdraw up to $10,000 in the 2019/2020 financial year and up to a further $10,000 in the 2020/2021 financial year.

For many people this early access to super will prove to be a financial lifesaver, but for others the short-term gain may lead to a significant dip in wealth at retirement. And the younger you are, the greater that impact on retirement is likely to be.

Alexander provides an example that many people will be able to relate to. He’s a 30-year-old hospitality worker, and due to the casual nature of his recent employment he is not eligible for the JobKeeper wage subsidy. He is eligible to apply for early release of his super under the COVID-19 provisions, however before going down this route he wants an idea of what the withdrawal will mean to his long-term situation.

Taking the max

Much depends, of course, on the future performance of his superannuation fund. However, if Alexander withdraws $20,000 over the two financial years, and if his super fund delivers a modest 3% per annum net return (after fees, tax and inflation), then by age pension age (67, if born from 1 January 1957), Alexander will have $39,700 less in retirement savings if he doesn’t make the withdrawal.

At a 4% net return, he will be $65,360 worse off if he makes the super withdrawal.

But that’s not the only disadvantage for Alexander. A smaller lump sum at retirement means a lower annual income. If Alexander draws down his super over a 20 year period, at a 3% net return, he will be around $2,670 worse off each year as a result of making the withdrawal. Over 20 years that adds up to a total loss of $53,375. At a 4% return, his youthful withdrawal will cost him over $96,000 by the time he reaches 87.

Reducing the risk

On the plus side, if Alexander is eligible for a part age pension when he retires, his smaller superannuation balance may see him receive a bigger age pension.

There are other things Alexander can do to reduce the financial consequences of accessing his super early. One is to only make the withdrawal if he absolutely has to. Or if he does make the withdrawal, to use the bare minimum and, when his employment situation improves, to contribute the remaining amount back to his super fund as a non-concessional contribution.

COVID-19 is adding further complexity to our financial lives, so before making decisions that may have a long-term impact, talk to your Bridges financial adviser.

Waiting in cash until share markets fall

As any long-term share market investor knows, markets can go up and they can go down. While most people view a falling market as a bad thing, some investors see it as a buying opportunity. After all, it’s better to pay, say, $60 for a share after a market dip than $100 for the same share at the market peak.

Of course, to be able to exploit these buying opportunities, the cash needs to be available. That means hoarding some extra cash while markets are happy in anticipation of a rainy day. It also means having a strategy around when to invest, how much to invest, how long to hold and what to invest in. There isn’t a single, off the shelf solution to this, but 58-year-old Barry provides an example of what the rainy day investor needs to think about.

How much?

Barry is a seasoned investor with a sizeable self-managed super fund. He has weathered several market slumps over the years, and when markets are trading normally, with low volatility, he is happy to build up a cash reserve of up to 20% of his fund’s value to be used when the share market goes ‘on sale’. The cash comes from dividends and distributions, contributions and realised capital gains.

When to invest?

With no hard and fast rules, Barry decides that if the market falls by 10 per cent he will invest 25 per cent of his reserved cash. For each further fall of 10 per cent he will invest a further 25 per cent, so after a market fall of 40 per cent, all his cash stash will be invested. This could occur in a short time period or evolve over many months of ups and downs. In some market corrections he may not use all of this cash.

What to invest in?

Barry has some favourite shares and if they fall significantly in value he will top up his holdings. However, he knows this involves more risk than buying the market, so most of his purchases will be of index funds.

How long to hold?

In volatile markets price movements can be sudden, dramatic, and in either direction. Barry’s strategy is to sell any shares that produce a gain of 20 per cent or more during the recovery phase. He also uses stop-loss orders to provide some protection from further sharp falls. Barry also limits himself to buying quality assets, and is prepared to hold them long term if the recovery is a slow one.

Barry knows his strategy isn’t perfect. If share prices don’t fall, he is left holding larger amounts of low-yielding cash than would normally be the case. If they fall a long way, he’ll miss out on buying at the bottom of the market. But Barry gains some peace of mind that if (or when) market corrections do occur, his strategy should provide some protection to his super portfolio and improve his long-term position.

Seek advice

This is just one example of a rainy day cash strategy. Everyone’s circumstances differ, and it is important to seek appropriate advice specific to your situation. Talk to your Bridges financial planner about a solution that’s right for you.