Money lessons from the coronavirus pandemic
As restrictions ease around Australia, finance expert Noel Whittaker looks at why you need a post-coronavirus plan for your money.
The COVID-19 crisis, and all its associated damage, is further widening the gap between savvy money managers and those who live for the moment.
The opportunity to withdraw up to $20,000 from superannuation in this financial year and the next is a great example. I know of a 55-year-old house cleaner who withdrew $10,000 just to accessorise his motor vehicle, and a car dealer who specialises in cheap used cars tells me the under-$10,000 market is booming.
Think of the long-term implications of this: taking money that was quietly growing in a low-tax area just to get some cash for consumer spending.
And many self-funded retirees, who have spent their life working and saving, are now reaping the (immediate) rewards. Prestige car dealers tell me they have never been busier, as wealthy retirees use the $50,000 or so they would have spent on an overseas cruise to change their present five-year-old vehicle to a brand-new one.
But caution is strongly indicated. We were all shocked by how fast stock markets fell, heartbroken by the queues at Centrelink offices, and frustrated at being confined to our homes.
Unfortunately, we humans have short memories – we are now enjoying the stock market bounce, loving the fact that many of the restrictions have been lifted, and looking forward to life returning to normal.
Why normal may be a long way away
There are plenty of warning signs ahead of us. The building trade is in serious trouble, with a massive drop in demand predicted as immigrant numbers tumble. Some of our biggest sources of employment are sports and the arts, but large events such as football, concerts, theatre and festivals won't work well as long as social distancing is enforced and numbers are restricted.
It's the same with clubs and restaurants. And of course, one of the biggest losers is the tourism industry, which absolutely depends on both local and international borders being open. At the date of writing, interstate travel was still a controversial topic – let alone international travel. Unemployment will continue to be rife in these areas.
And it gets worse. In just four months, both JobKeeper and JobSeeker will cease, loan repayment holidays will end, and concessions like the payroll tax holiday for businesses will be no more.
Remember, repayment "holidays" are not gifts. Even though many banks have offered to waive six months of interest repayments – during which borrowers will be charged interest on interest – normal repayments will almost certainly be required when the "holiday" ends.
It's not all doom and gloom
The good news is that wise money managers can still do well if we look for opportunities within the current circumstances.
Just this week I was analysing whether it is currently better to rent or buy. Previously, renting was almost always cheaper than buying when mortgage repayments, annual maintenance and other outgoings were accounted for. But, for the first time, buying is looking to be no more expensive than renting.
Think about a house worth $500,000 compared to renting for $500 a week, or $26,000 a year. A person who borrowed the entire purchase price at 2.6% (the rate offered by one of the loans shown at Finder) would have payments of $2,000 a month, or $24,000 a year. It's virtually line ball.
Of course, there are other considerations, such as the amount of money needed for a deposit, and mortgage insurance, but I have no problem with a couple withdrawing a total of $40,000 from their superannuation if that would boost their deposit to at least 20% of the purchase price. This could save $12,000 in mortgage insurance.
The lesson? It's the perfect time to top up your superannuation while unit prices are down, and also a great time to buy a property if you do your homework and find a bargain. But remember the key to success in real estate is to buy cheap and add value: follow the principle of getting "the worst house in the best street". The most important factor in your buying decision should be location – it's worth paying more for a better location even if the house needs work. And remember, stay away from apartments – you can't add serious value to them.
What should we watch out for next?
Recently, ABC radio listeners were talking about how much money they were avoiding spending by working from home. In some cases it was nearly $400 a week. But I wonder how much of that money was saved. Human nature being what it is, I reckon much of it would have been wasted.
The next issue is government budgets. Both federal and state governments have been throwing money at the crisis, but eventually the cost of this will be immense.
To make matters worse, income tax receipts are going to be way down. Most professionals I know have had their income fall by at least 35%, a lot of landlords are now receiving no income at all, and many people are scraping by on JobKeeper or JobSeeker.
When you take all the above into account, the inescapable conclusion is that things will get worse before they get better.
Unemployment will continue at record levels, many businesses will close down, never to reopen, and government budgets will be under serious pressure due to a combination of declining tax receipts and the cost of the stimulus packages.
I guess there is good news for borrowers in that interest rates will stay at record low levels, which gives people the perfect opportunity to get way ahead in their loan repayments. But this is not a time for rash spending – it's a time to hunker down and get your finances in order, to build the safety buffer that you may well need.
Noel Whittaker is the author of Making Money Made Simple, which has sold over a million copies. He has written numerous other books on personal finance and is one of Australia's foremost financial commentators.
Disclaimer: The views and opinions expressed in this article (which may be subject to change without notice) are solely those of the author and do not necessarily reflect those of Finder and its employees. The information contained in this article is not intended to be and does not constitute financial advice, investment advice, trading advice or any other advice or recommendation of any sort. Neither the author nor Finder have taken into account your personal circumstances. You should seek professional advice before making any further decisions based on this information.
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