Lower your bills, increase your cash stash and survive the global upheaval.
AUSTRALIANS are battening down the hatches over fears of a second global downturn. With such relentlessly negative finance news, and cost pressures biting day to day, how could we not?
Let me reiterate that although it may not sound and feel like it, Australia is in a strong position to cope with whatever the world throws at us in the coming months.
We have low debt: the International Monetary Fund estimates 24 per cent of GDP this year as opposed to 100 per cent for the US and 152 per cent for economic basket case Greece. And our much-hyped budget deficit is scheduled to fall from minus 5.9 per cent to minus 2.8 per cent this year. Japan and Britain are at minus 9 per cent and the US at minus 10 per cent.
What all that means is that the government could spend our way out of another crisis.
We also have more scope than other developed nations to stimulate the economy through interest-rate cuts. Our official rate is 4.75 per cent in the US, it is effectively zero.
But with talk of job cuts, who can blame us for worrying about our own household's ability to withstand a fresh global downturn?
We're saving more than ever, with the average household stockpiling 11.5 per cent of income, according to the Australian Bureau of Statistics. The figure spiked to a similar level in the first debt crisis, the highest for 25 years.
That's smart whatever the conditions. Ideally, you should have a lump sum of at least 10 per cent of your annual income in case of emergency.
If you house this in your mortgage, check that you can actually get at it if - perish the thought - you lose your job.
While we're on the subject, it's a common misconception that if you are ahead on your mortgage and you land in financial trouble, you can stop making payments. You can't unless it is specifically in your contract - a repayment holiday following childbirth, for example. So to be safe you again need the facility to redraw the excess and drip feed it back in as repayments.
Those repayments will be a whole lot lower if you're on the best deal available. Remember, the difference between the big banks' variable rate and the best is more than 1 percentage point. That saves $214 a month on a $300,000 loan (and more than $64,000 over 25 years).
Get a better rate on any credit-card debt and, while it won't decrease your minimum monthly repayments, you will clear it faster.
In your bid to decrease bills and increase your cash stash, you can also save on other so-called fixed costs.
If you own your handset, mobile deals are available for as little as $19 a month. Voice-over Internet Protocol (VOIP) lets you make overseas phone calls, computer to computer, at tiny cost. And with all that in place, do you still need a home phone?
You can similarly save by switching to a better deal for your various insurances. Remember income-protection insurance, though expensive, is tax deductible. If you're faced with a financial crisis that is due not to the economy's health but your own, this will be your saviour.
While we're being macabre, make sure you have adequate life insurance (which will pay out early if you are facing a terminal illness) to look after your family.
Another essential step to safeguard the future is to re-examine your investments. These need to be appropriate to your risk profile - broadly, as you get older you should reduce your exposure to growth assets such as shares.
As in any investment environment, your money needs to be spread not only across assets but also within them - a range of stocks across a range of sectors, preferably in a range of countries - to protect your wealth.
Follow this writer on Twitter@NicolePedMcK
Frequently Asked Questions about this Article…
Is Australia in a strong position to withstand a global economic downturn?
Yes. The article points out Australia has relatively low public debt (the IMF estimates about 24% of GDP), and a budget deficit that is expected to narrow from -5.9% to -2.8% this year. By comparison the IMF figures cited include the US at about 100% of GDP and Greece around 152%. That fiscal headroom — plus scope to cut interest rates — means Australia is reasonably well placed to cope if global conditions worsen.
How much should I keep in an emergency fund during uncertain economic times?
The article recommends holding a lump sum of at least 10% of your annual income as an emergency fund. It also notes Australian households are already saving more, with the average household stockpiling about 11.5% of income according to the ABS — a sensible buffer if job cuts or other shocks occur.
Is it safe to keep emergency cash in my mortgage account, and how can I access it if needed?
You can house extra cash in your mortgage but only if you can actually access it when needed. The article advises checking that your mortgage has a redraw facility (or similar) so you can withdraw excess repayments. Also remember you can’t simply stop mortgage payments if you run into trouble unless that option is explicitly written into your contract (for example a specific repayment holiday).
How much can switching to a better mortgage rate save me?
According to the article, the gap between the big banks’ standard variable rates and the best available rates can exceed one percentage point. On a $300,000 loan that difference can save around $214 a month and more than $64,000 over 25 years, so shopping around for a better mortgage rate can materially lower repayments and increase your resilience.
What everyday bills or fixed costs can I cut to increase my cash stash?
The article suggests reviewing mobile plans (some deals start around $19 a month), ditching an unused home phone, using low‑cost VOIP for overseas calls, and switching to better insurance deals. It also recommends improving credit‑card interest rates to help pay down debt faster (even if minimum payments don’t drop).
Is income protection insurance worth the cost and is it tax deductible?
The article describes income‑protection insurance as expensive but potentially a lifesaver if a personal health issue or loss of earnings causes financial hardship. It also notes income‑protection premiums are tax deductible, which can offset part of the cost for some taxpayers.
Should I change my investment mix because of a possible downturn?
Yes — the article recommends re‑examining your investments to make sure they match your personal risk profile. Broad guidance is to reduce exposure to growth assets such as shares as you get older, and to diversify not only across asset classes but within them (different stocks, sectors and countries) to help protect wealth in volatile markets.
Will government stimulus or interest rate cuts help cushion a downturn?
The article argues they could. It says Australia has more fiscal and monetary room than many developed nations to stimulate the economy — government spending could be used and there is scope for interest‑rate cuts. The piece also references that some countries have very low or near‑zero policy rates while others (noted in the article) have higher official rates, underscoring differences in room to manoeuvre.
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