We are entering an unprecedented time. The Reserve Bank has announced an Official Cash Rate drop of 0.75% leaving the cash rate at a historic low of 0.25%. Most economists expect a recession to occur which can lead to a loss in business confidence.
The key problem in a recession is the lack of business confidence. Business owners lose clients and either downscale or freeze hiring. If you are a business owner, you need funds to ride through the storm. If you are an employee, you need funds to allow for redundancies or any other loss of income.
If you cast your mind back to the dark days of 2008, the sudden and unforeseen collapse of Lehman Brothers (amongst others) triggered a recession in the US that spread across the world. This time, however, the trigger appears to be the Coronavirus which we have seen coming for a couple of months now. The difference, therefore, is that this is a much slower moving event and we have time to prepare for what is in store.
When things are going well, it is easy to spend money on luxury items. While cutting back on these expenses is exactly what causes a recession (a recession is just a reduction in spending in the economy), now’s not the time to take one for the team. What are you spending money on that you don’t need? Today is the day to sit down and complete a budget (here’s a free one for you to download).
Today is the day to sit down and complete a budget
Usually a mortgage is a “set and forget” arrangement; at least until your fixed rates are due for renewal. But with uncertainty in the economy, you want to make sure your mortgage is setup if the worst should happen. Too many people had bad Credit Reports in the 2008-2010 from not being able to pay their debts (either Credit Card or mortgage). But this time around, we have a warning and we can prepare our mortgages for a downturn.
It’s definitely time to review your Secondary Debts and there are a number of things you could consider:
The goal of restructuring or removing your Secondary Debt is to increase the amount of available income that you have. You can use this income to build up a buffer in your cash savings or your mortgage.
Unless you are preparing to buy a home in the next 6 months (or over 65 years old and looking to retire), it would be extremely unwise to move your KiwiSaver into a more conservative fund. The markets have already come back from their highs so any transfer to a Cash Fund now locks in those losses. And it's almost guaranteed that you won't pick the bottom of the market - even the best Fund Managers miss the turn - so you will miss out on potential profits later.
On average, markets jump by 28% the year after a major crash. This is part of the roller-coaster of investment and not a time to exit.
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