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Our lives, livelihoods and conversations are all consumed by the impacts of the coronavirus. The 24/7 media is in overdrive with doom and gloom as we comprehend what life will look like over the coming months. Our country is shutting down. State borders are closing. Businesses are locking their doors and thousands of Australians are being told they have no work. As a result, there are 800m long queues outside Centrelink offices. All while we have watched on in fear as the stock market falls and takes many people’s life savings with it.
So, what should you do in times like these? Well, that depends on if you are either:
- employed or self-funded retiree; or
- unemployed, suffer ill health/ disabled or pensioner (part pension)
Depending on your financial/employment situation – below is a list of recommendations on how to prepare and protect your finances during this recession.
Everyone – Right Now
As Prime Minister Scott Morrison has been saying, this virus will affect our lives and our livelihoods. However, health is the most paramount. Without life, there is no livelihood. We therefore need to look after each and follow some simple steps:
- Listen to the authorities – Department of Health, World Health Organisation. Avoid opinion-based news and social media platforms. Fear and misinformation are our greatest enemy during this crisis.
- Wash Your Hands – 20 seconds, often, no excuses.
- Practice Social Distancing / Self Isolate – the most powerful tool we have in the fight is social distancing (i.e. stay away from people), it has the power to literally save lives. By not doing it the consequences can lead to the death of your close friends and family (particularly the elderly).
- Stop Checking Your Portfolio – it achieves nothing and will only bring you negative feelings.
- Minimise time on social media
- Support Small Businesses – particularly buy local as much as possible based on your personal circumstances.
Defence – If Employed or a Self-Funded Retiree
Cut down your spending, pay down your debts and give yourself a ‘cash’ buffer. If your industry is lucky enough not to be currently affected by the coronavirus lockdowns below are some defensive tips.
Increase Your Cash Reserves
If you are still employed or are a self-funded retiree, start putting some money away if you can. If you already have an emergency pot of cash, well done. If you don’t, start building one now. Advisers regularly recommend to their clients to have enough money to cover six months of basic living expenses as your “rainy day” fund. This fund can help protect you against emergencies such as losing your job or falling ill, or in this case a global health crisis. The pandemic is unfortunately here, but the advice is to continue saving if you can. Things are changing daily. It is not known how long the world will be affected by this virus.
Get on Top of Your Short-Term Debt
Ambareen Musa, founder of UAE comparison site Souqalmal.com, says history shows that during a recession or financial crisis, the people who fare worst are those who have excessive debt. “If you lose your job, this will make it harder to keep up with repayments on your mortgage, credit cards and any other debts.” There are a number of strategies you can use to reduce your debt spelled out in Our Debt Reduction guide. Ms Musa advises a high-interest focus approach, whereby you start paying off liabilities that have the highest interest first. Once you have cleared that, move onto the next most expensive, and then the next, while still making the minimum monthly repayments on any other types of credit you have.
Defer Large Purchases and Review Your Expenses
Focus and prioritise your needs, avoid and defer any large scale wants. When we live in such uncertain times focus on the essentials. Cutting back right now could be much easier than usual as many places are shut down for a while and social distancing and isolation are becoming common terms.
Decrease Your Self-Funded Pension
The Government is temporarily reducing superannuation minimum drawdown requirements for account-based pensions and similar products by 50 percent for 2019-20 and 2020-21. This measure will benefit retirees by providing them with more flexibility as to how they manage their superannuation assets. The government has recently halved the drawdown rates on superannuation accounts. Speak with your financial adviser for advice.
Don’t Panic & Don’t Sell
Fear is our greatest enemy and will not help you, your family or your portfolio. Remain calm. The world has been through challenging times in the past and has recovered. Likewise, so have economic markets. Avoid selling, otherwise you will turn your paper losses into real losses and lock yourself out of any market recovery.
One year after swine flu struck in 2009, the US S&P 500 index was up an impressive 35.96 percent. A year after the avian flu outbreak in 2006, the index was up 18.36 percent. Similarly, markets rose 17.96 percent in the year after the Middle Eastern respiratory syndrome (Mers) outbreak in 2013. The Covid-19 outbreak looks to be a lot more serious but with luck, the same pattern should still apply.
Defence – If Unemployed, Suffer Ill Health/Disabled or a Pensioner (Part Pension)
The economic cyclone that is the COVID-19 virus has unfortunately closed many small businesses and with it many jobs. If you are a casual or in a front-line industry (hospitality, entertainment, tourism or a travel agency) you are likely already affected. Below are some tips on how to get through these difficult times:
Job Seeker Payment (formerly known as Newstart Allowance)
The federal government has effectively doubled the Newstart allowance to $1100 per fortnight for the next six months, they have waived the asset test and the waiting periods. This can be applied for online. As soon as you find yourself unemployed or underemployed apply for this via the myGov website and payments will be backdated from the date of application.
Deeming Rate Changes
Deeming rules are used by the government to work out income from your financial assets, which is then added to your other income, and the income test is applied to work out your payment rate.
As part of the first coronavirus stimulus packages, the government made changes to the deeming rate. The Government has reduced the deeming rates by a further 0.25 percentage points to reflect the latest rate reductions by the RBA. As of 1 May 2020, the lower deeming rate will be 0.25 percent and the upper deeming rate will be 2.25 percent. The change will benefit around 900,000 income support recipients, including Age Pensioners.
Age Pension Increase
It is important for all Centrelink clients to update their investment balances. The announced lower deeming rates will benefit “income tested” clients and in addition, deeming rates can be applied to new lower investment balances many will have after the share market fall. Reduced asset values will likely see increases to “income tested” clients’ current entitlements.
For example, a typical balanced homeowner couple with $500,000 of assessable assets could increase their current Age Pension entitlements from $545 each per fortnight to $695 each per fortnight (a total increase of $7,800 pa).
Early Release of Superannuation
The Government will allow individuals in financial stress as a result of the Coronavirus to access up to $10,000 of their superannuation in 2019-20 and a further $10,000 in 2020-21. Eligible individuals will be able to apply online through myGov.
This should only be used as a last resort in only the direst of circumstances as drawing money out now is the worst possible time and will have a significant impact on your future account balance when markets rebound. Nevertheless, you must be able to live, eat today and worry about tomorrow later.
Further information can be found here: https://treasury.gov.au/sites/default/files/2020-03/Fact_sheet-Early_Access_to_Super.pdf
Offense – Take Advantage of the Opportunities
Look for Investment Opportunities
“Be greedy when others are fearful, and fearful when they are greedy” – Warren Buffet
If you have cash, you are in a prime position to seize the moment. The opportunity is that global stock markets have fallen by around 30 percent. If you are feeling brave, now could be a good time to get greedy and buy shares at discounted prices.
Whilst buying low and selling high is the goal, we will never know the optimal time to invest, it is difficult to predict the bottom. Remember that the market may go down a bit more before it inevitably goes back up. Therefore, it is important to be level-headed.
This means you should only invest money you do not expect to need in the short term, and ideally much longer. Do not let fear drive your decision making, do not panic. If you have the time to look around there are (potentially) many opportunities. https://www.elliotwatson.com.au/keep-calm-dont-turn-your-paper-loss-into-a-real-loss/
A more conservative approach may be to drip-feed money in, taking advantage of any dips, rather than throwing in a single large sum, which leaves you vulnerable to the next sell-off.
This crisis will sort itself out but there may be more pain to come before it gets better. Stocks could continue to fall, but when the coronavirus threat is under control they could rise quickly, and you do not want to miss out on that.
Review Your Portfolio
The coronavirus has caused significant damage to the world economy and with it, many businesses are hurting, some are in big trouble. We will beat this virus, we will recover and with it so will the economy, businesses and jobs. However, the recovery will likely not be balanced. Your investment portfolio must take this into account. Quality businesses with strong balance sheets and low debt are likely to do much better than the reverse.
Now is the time to reach out to a financial planner. Making ill-informed decisions now can have a long-lasting impact to your future. Australians will have some difficult decisions to make regarding their lifestyles, finances and how best to navigate the stimulus packages rolled out by the Australian Government. Navigating these complex rules and regulations is their specialty.
These are difficult times. A 1 in 100-year event. The world has faced many challenges in the past and it will again in the future. But remember the current collapse was preceded by a ten-year bull market. As the virus starts to subside and the good news stories start to surface the market will turn.
US Bull and Bear Markets Since the 1900 to 2018 (118 years)
Time period: 31 January 1900 to 31 December 2018.
Source: Global Financial Data.
Past performance is not a reliable indicator of future results. The value of investments and the income from them may fall or rise and investors may get back less than they invested.
The information within, including tax, does not consider your personal circumstances and is general advice only. It has been prepared without taking into account any of your individual objectives, financial solutions or needs. Before acting on this information you should consider its appropriateness, having regard to your own objectives, financial situation and needs. You should read the relevant Product Disclosure Statements and seek personal advice from a qualified financial adviser.
The views expressed in this publication are solely those of the author; they are not reflective or indicative of licensee’s position and are not to be attributed to the licensee. They cannot be reproduced in any form without the express written consent of the author.
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2. Steps to Prepare and Protect Your Finances During the Coronavirus Recession