The financial effects are starting to bite for many as the lockdown approaches its third week, and while it’s hard to know exactly what to do and when to do it with our assets, the experts say we’ll need a lot more cash in our bank accounts than we expect.
“The general rule of thumb is to have between three to six months’ worth of savings within easy reach,” says Jose George, general manager of financial comparison agency Canstar New Zealand. “But that would be for normal circumstances, as a buffer for shocks such as redundancy or events that temporarily impact income.
“In a pandemic, circumstances are not normal. With a recession almost certain and warnings of unemployment rife, people should err toward a longer time frame.”
Rupert Gough from Mortgage Lab says a good safety net could be around five months’ worth of expenses.
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“In this lockdown period, it's become clear that three months probably isn't enough because we can't apply and interview for a job while we're in isolation. We really need, therefore, the lockdown period plus three months in cash.”
But, Gough says, for a large number of New Zealanders, even having three months’ worth of savings is unrealistic.
“It's generally agreed that, on average, most New Zealander have less than a month of savings. A disturbing amount lives paycheck to paycheck.”
George says that Canstar’s 2019 national survey of nearly 3000 New Zealanders suggested a large proportion of New Zealanders are unlikely to be as prepared as they should be. Its research showed 68 per cent of respondents did not have a savings nest egg outside of KiwiSaver, while of those with other savings, only 42 per cent had funds in the form of savings or term deposits. Others had assets such as property and shares, which are not always easy to access.
However, when it comes to the best amount of cash on hand, George says there’s no one-size-fits-all answer.
“People do have very different habits when it comes to saving and spending, and different comfort levels when it comes to planning for their future – some are comfortable spending all their budget each week, while others always put some savings away.”
So during the lockdown and the months following, what can you do to help stretch and bolster your savings account?
Take advantage of government help
Investigate the assistance packages on offer from the Government and the banks which include wage subsidies and mortgage holidays for those who have lost jobs or had their hours reduced. If you are renting, Gough suggests you contact your landlord or rental manager and ask if there is something that can be arranged.
“It's important to remember that this situation isn't caused by something you've done. Every single New Zealander is in the same boat and asking for payment relief is absolutely something that should be done if required.”
Adjusting your KiwiSaver strategy is also something to consider, Gough says, but only if you don’t have enough savings or loss of income.
“If people don't have enough cash available, they may consider temporarily reducing or pausing their KiwiSaver payments so that they have more cash available day-to-day. This would be a strategy to use if, say, one person in a couple has lost their income. Once everything is back to normal, restart those KiwiSaver payments again.”
George cautions that while taking advantage of offers like mortgage holidays may alleviate pressure in the short term, it will, of course, add greater cost in the long term. “So anyone taking advantage of these offers should be prepared to absorb the extra costs later down the track.”
If you take up the Government’s economic stimulus package, he says be careful to use the money wisely.
“Emergency funds such as the wage subsidy are quite likely to fall short of actual costs incurred over this time. So, don’t go on a spending spree. These funds are designed to keep you and your family afloat through a difficult time, when there’s no clear end in sight.”
Take a good look at your outgoings
Now is the time to audit your weekly expenses, bearing in mind that mortgage or rent will take up 30 to 50 per cent of your outgoings, while secondary debt such as credit cards and car loans can add an extra 10 per cent.
George points out that working from home will inevitably raise some household costs, such as electricity and gas, so take this opportunity to shop around for better deals, then implement a budget.
“We would certainly recommend people take a minute to tick off their various household expenses, and do some desktop research on the best supplier and/or package deal. Much of this research is easier to do than you might expect – it might just be a matter, for example, of plugging your electricity bill figures into an online calculator to see where savings can be made.”
Other ways to stretch out your savings if they are meagre include old tricks such as using careful planning to reduce food costs, Gough says. “Basic, cheap foods such as rice and potatoes still provide caloric benefit and, if [they’re] bought in their purest form, savings can be made.
“It would also be a good time to review all those subscriptions you have. Are you really watching all of those streaming services or did you just sign up months ago to watch The Handmaid's Tale?”
George says to keep back your savings for costs that can only be paid in cash such as mortgage repayments wherever possible and, as a last resort, if you find yourself in serious financial difficulty, “consider switching utility payments and other expenses like supermarket purchases to low rate credit cards to cover short-term cash shortages”.
“This will create breathing space, but only for a brief period. It will be important to keep track of your credit card expenses and manage payments as they fall due.”
On the other side
Both agree there will be some financial positives to come out of the lockdown.
George says: “Consumers can be confused or ambivalent about their household bills. But a time like this allows us to pause, consider our costs and likely streamline our household budgets. That outcome, along with greater financial confidence, would be one really positive side effect of this period.”
Gough adds: “Business activity should return to normal quite quickly after Alert Level 2 (or better) is reinstated. If business cash flow has survived, there's no reason why the economy couldn't return to normal very quickly.
“Financially, this means people need to be able to survive until Level 2 is reinstated and after that, if their employer is still trading, life should return to normal.”
Advice for first-home buyers
These uncertain times can put first home-buyers off investing in their first home, George says, but on the flipside, interest rates are historically low. “Those considering buying a home should continue to explore this option and speak to mortgage brokers about any deals that are on offer from the banks.
“However, making the decision to buy is a big one and anyone doing so should be comfortable — along with their bank — that their income level will be more than sufficient to make the mortgage repayments.
Gough advises getting rid of unnecessary expenses and making a budget, as well as keeping money available in the bank, not locked in KiwiSaver, until the worst of the lockdown is over. And, he says, use this time wisely to upskill and improve your employment prospects.
“Complete some online courses and get trained up over the next four weeks. If your income increases, your deposit will increase in the future.”
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