The pandemic has thrown us all for a bit of a loop but financial adviser Helen Baker’s tips can help you crisis-proof your finances, regardless of where you are in life.
The coronavirus situation has impacted all of us differently, but your current life stage will help determine how best to respond. From starting out on our own through to retirement and our twilight years, the chapters of our lives directly correlate with the way we earn, save and spend, so too do the major events scattered along the way: singledom, marriage, divorce, children, self-employment, redundancy, illness, inheritance, and the death of a partner.
But out of nowhere, COVID-19 has had a sudden and massive shake-up to our finances. Consider which of the following life stages you’re currently in, and how best to position yourself for the future:
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Early Adulthood (20s and 30s)
Ah, the days of feeling invincible with the world at our feet! It’s during these years we tend to settle down with a partner, start a family, begin our careers and take on our first mortgage. But it’s also where we’re most likely to neglect our finances, much to our own detriment.
Cementing strong foundations early in life makes a HUGE difference to our long term financial health. This should include:
- Establishing an emergency fund (COVID-19 being a prime example of why one is necessary!).
- Taking out adequate insurance cover (income protection will not cover you from job loss, but covers you if you can’t work due to sickness or injury including mental health. If you’ve lost your job you may need to wait until you’re earning again to apply).
- Investing in your future earnings potential – consider retraining or upskilling.
- If possible, resist touching your super if you’ve lost your job. When you’re young, you’ve got the greatest capacity to be aggressive in your wealth building; but it’s the riskiest investments that have currently suffered the biggest falls, meaning you’d be selling out at the low point.
- Use the downtime to set up good financial habits. Even if you’re earning less, you can still establish a routine and adjust the dollar amounts when things normalise.
These are often our consolidation years: We focus on stabilising debts (including the credit cards of our youth) and refinancing mortgages. Our earning potential grows, but as our kids enter their teenage years, school fees and family living expenses are at their peak.
Keep your funds in check by:
- Getting the best value. Negotiate a better mortgage rate; review your utilities and insurances to see if they’re cheaper elsewhere.
- Ensure your insurances meet your current needs. That includes income protection, health insurance for your growing family, as well as home, car, and other asset protection.
- If you really need to access your super to cover lost income, be disciplined in replacing it. Taking out $10,000 now and not repaying it could ultimately cost you over $200,000 by retirement age!
- Once your earnings go back to normal, you can use the government’s super ‘catch-up’ rules to rebuild your super balance from any earnings lost to COVID-19.
Pre-retirement (50s and 60s)
With the kids having flown the nest and our earnings at their peak, we shift to focusing on protecting the wealth we have built over the years and boosting it further before we retire.
With this in mind:
- If you had an emergency fund in place, you should be covered if you’ve lost your job. But be sure to replenish those funds ASAP to cover any future situation (which could even be a second wave of COVID-19).
- Again, if you do need to access your super early, be sure to replace it. You’re effectively borrowing from yourself.
- Consider additional investments – could home equity be put to better use?
- Invest in your health, enabling you to keep working (and earning) longer and help stave off health problems later in life.
Twilight years (70s and beyond)
By this time, most of us have retired, allowing us to focus more on the things we enjoy: spending time with family, travelling and indulging more in our hobbies. We’re also now drawing down on our superannuation and investments.
But remember that this age group is most vulnerable to COVID-19, meaning it’s important to cover yourself and your family should you get sick:
- Only drawdown from super what you need.
- Consider whether your current home and living arrangements are fit for purpose.
- Beef up your emergency fund with any surplus cash.
- Check your insurances and your Will are up to date.
- Ensure your partner does the same to keep you protected!
Yes, coronavirus has changed the way we live. But it needn’t change our money habits for the worse. In fact, managing our money is one of the few things still within our control!
Helen Baker is a licensed Australian financial adviser and author of On Your Own Two Feet – Steady Steps to Women’s Financial Independence. Helen is among the 1% of financial planners who hold a master’s degree in the field.
Note this is general advice only and you should seek advice specific to your circumstances.