Winter is Coming!

Winter is Coming!

2020 will be a tough year. Here’s how to protect your finances during these tumultuous times.

The coronavirus has created not only a health crisis, but also an economic crisis of proportions that most of us would not have witnessed in our lifetime. In this blog I look at ways to protect yourself financially to lessen the impact of the impending recession. In short, you should:

  1. Understand the significance of a household budget and learn how to create one.
  2. If you already have a budget, take the time to reassess your expenses given the tough times ahead.
  3. Seek help early.
So what is a budget and why is it important?

A budget is a reference tool that sets out what you earn, what and where you spend, and what you can save. Having a budget in place is the first step of taking control of your finances.

The traditional approach to budgeting is the 50/30/20 rule: where 50% of your after tax income is applied to needs; 30% is applied to wants; and 20% is applied to savings. However while this is an ideal situation, it may not be possible to achieve this split in the current climate.

Before you create your budget, there are a few things that you need to do to:

  1. Know what income you actually receive – look at your bank statement and tax returns. Don’t include money such as bonuses that you have not yet earned.
  2. Know what you spend – the best way to do this is to keep a spending diary. Even if it’s a cup of coffee, write it down and find out how much you actually spend.
  3. Identify the goals you may have for the next 12 months and prioritise them. For example:
    • I need to support my family on one income for the next 6 months;
    • I would like to clear my $3,000 credit card; or
    • I need to paint my roof and it will cost me $7,000.

Once you have your income, expenses and savings goals sorted out, you can simply list them into a spreadsheet, or use a ready made Budget Planner such as the one on our website.

In the below example, I entered data as per the suggested categories. From there I creatded a summary which looks like this:

Regularly review and reassess your budget:

Regardless of how long your projected budget is for, it is prudent that you review your priorities and expenditure, as this often changes.

You can see from the example above that ordinarily, this couple live very comfortably with excess income each week that could be applied towards their savings or other financial goals. However, circumstances can and do change: whether it be a new baby; increase in insurance premiums; higher than normal electricity bill; these things can blow your budget.

Let’s assume that one person from the example above loses their job and they were earning $2,000 per week. Without adjusting their budget, it is pretty clear that they will spend more than they earn.

Particularly in situations like this, you need to reassess your spending habits as you have little control over the income in the short term. You should consider which of the areas of spending you may be able to save on. There will be expenses that you can’t do much about, but most people will find ample room in their budget to change their discretionary spending habits.

For example, assume this couple stop spending on Leisure and Entertainment. This now leaves the couple with a weekly surplus of $27. Whilst still not living comfortably, the couple are now able to afford their usual expenses.

Once you have reviewed your current expenditure, you should also consider the impact of those unexpected expenses that crop up from time to time, such as a water leak that needs fixing. You could include an allowance for such expenses in your budget or be aware of your savings position such that you can afford to pay for it if the situation arises.

In this example, simply by knowing how their money is spent, and where they can make savings, the couple are more in control of their finances which will help to keep a roof over their heads and food on the table, despite the current hardship they are facing.

 

Seek help early

One of the benefits of being in control of your finances is that if you face times of hardship, you can act early before the bills pile up and you are hit with penalties and default demands.

Being in control of your finances puts you in a strong position to make any changes required to stay afloat each week. Ways you can do this include:

  • For loss of income: Contact Centrelink to see what assistance may be available to you.
  • For help with your business loans, mortgage repayments or credit cards: talk to your lender or your broker. Particularly in the present Coronavirus crisis, lenders will most likely be amenable to reaching a solution to avoid you falling into default.
  • For help with paying bills whether it be utilities, rent, insurance, or rates: contact your relevant provider and ask for whether they can provide any of the following:
  • An extension of time to pay;
  • A repayment freeze;
  • The option to pay by installments; or
  • A reduction in the bill.

 

Final note:

Remember you are not alone in all of this and there are plenty of services ready to help with the stress of it all.

If you or someone you know is not ok, here are some important numbers:

  • National Debt Hotline: 1800 007 007 for free and confidential advice from professional financial counsellors.
  • Lifeline Australia: 13 11 14
  • Beyond Blue: 1300 224 636
  • Kids Helpline: 1800 551 80
  • Emergency: 000
  • Confidential Helpline: 1800 737 732
  • MensLine: 1300 78 99 78
  • Relationships Australia: 1300 364 277