Financial challenges in a COVID-19 world
In this article we look at the new economic realities for Australians in a COVID-19 world. We understand that this is a very challenging time for many, and we discuss measures people can take that can help improve their financial situation.
Employment and income challenges
This year the Australian economy will move into a COVID-induced recession for the first time in 30 years. Unemployment is expected to climb to double-digits, and underemployment – covering people with reduced work hours and who are looking for more work – is even higher at 13.7%. Surging jobless numbers will dampen household income which even before COVID-19 lagged household wealth by a long way1. Falling property prices from 2018 have suppressed both household wealth and income.
Financial stress is rising, but not uniformly
The squeeze on household income has magnified financial stress and anxiety for many people, especially younger people (25 to 34 years) whose wealth is growing much more slowly than the wealth of older households (55 years and over)2. Also, employment prospects for younger people may be less secure than older employees with more experience and skills. The harsher economic realities are reflected in the latest Melbourne Institute survey, Taking the Pulse of the Nation3:
- About a third of Australians are financially stressed; most (44%) are in the 18 to 44 age group.
- The number of 44 to 65 year-olds who are financially comfortable dropped sharply in April by 16 percentage points, with the proportion of financially stressed respondents in this age group increasing by 10 percentage points.
- About 20% of survey respondents feel depressed or anxious “most” to “all the time”.
- Respondents in the 65-plus age group are the most financially comfortable; in fact this proportion has actually increased.
Scrimping and saving
Even before COVID-19, the financial wellbeing of many Australians was precarious. The most recent (August 2019) edition of Dollars and sense: Compare the Market's Financial Consciousness Index report4 showed that many people are finding it increasingly hard to pay bills, are not regularly saving money, and feel their job security is less certain and would feel financial stress if they lost their job.
- 7.5 million Australians are finding it hard to pay bills and are not regularly saving money, with 2.8 million regularly falling short on money for utility bills, rent or mortgage repayments (this figure was up 11% on the year before).
- The Financial Consciousness Index (FCI) result fell to 48/100 in 2019, from 51/100 in 2018. The FCI measures people’s financial literacy, awareness of financial outcomes, and willingness to act.
- Not only are many Australians increasingly struggling to pay their bills, the number one ‘plan B’ for in times of financial emergencies is to rely on government support (37% in 2019 versus 33% in 2018). This figure will rise again in 2020.
Even more concerning is the April 2020 UBS survey5 report in which 39% of respondents said they had less than one month of savings as a buffer if they were to lose their jobs, while 63% of respondents said they less than six months of buffer. “Doing okay” is getting harder – and more expensive
“Doing okay” is getting harder – and more expensive
The low official inflation rate (2.2% annual CPI for the March quarter 2020) masks the reality of high living costs for most people. Since 2000, big ticket, essential items have gone up and up – like hospital and medical services (+195%), electricity costs (+194%), and pre-school and primary education (+159%). In the meantime, mortgage rates have been flat to slightly higher since 20176. The upshot is that an ever-higher cost of living is making it harder for people to get ahead in their finances. This is reflected in the latest Money Project7 survey from January this year:
- A slight majority of respondents (43%) believed they were “doing OK”, only 4% were on “Easy Street”, and the rest of the respondents were either on “Struggle Street (28%) or “Barely Coping” (14%).
- More than half the respondents set aside 26% to 50% of their salary to pay rent or the mortgage. Around half the respondents have more than $5,000 in credit card debt, while only 45% have more than $5,000 in savings.
- Nearly two-thirds of respondents think they’ll need more than $750,000 to retire, with 45% believing they’ll need more than $1 million. Retirement is the top saving requirement for respondents but the second most 'intimidating' future cost.
- The proportion of female respondents with salaries over $100k increased from 16% in 2017 to just 20% in 2019. In contrast, the proportion of male respondents with salaries over $100k went from 37% in 2017 to 41% in 2019.
- Most respondents blame government policy for cost of living pressures, followed by big business and a shaky global economy.
Strategies to help improve your financial situation
Putting the economy into ‘deep freeze’ to counter COVID-19 has increased an already heavy financial burden for many people, especially younger people, as mentioned. Key factors at play are high levels of personal debt, household income lagging (higher) living costs, and increasingly, reduced income as employment dries up.
While we understand that these are difficult times, there are things people can do to help improve their financial situation.
- A good first step is making a household budget and sticking to it. Setting realistic goals and executing on them is key. Reducing debt as much as possible is critical, especially credit card debt as it’s high interest.
- Reviewing expenses and trimming personal expenses like luxuries and entertainment; paying utility bills early; buying second hand clothes, shopping for supermarket specials; and filling up the petrol tank mid-week.
- On the income side, it can help to help to develop strategies to boost income through salary, super, share dividends, and investment property.
- On the savings side, it’s important to set money aside in the household budget – even small amounts add up over time, e.g. salary sacrificing (pre-tax) into super, investing in a term deposit.
What’s important in difficult times like these is to have a disciplined, forward-looking approach to managing money. A financial planner can help sharpen a household budget, then go much further in areas like tax, super and investments, and wealth and estate planning. Find out more about our advice services.
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This is general information only and does not take into account your specific objectives, financial situation or needs. We recommend you seek professional advice for your own circumstances. Contact us to make an appointment to see one of our representatives. When members receive advice, they receive it under our financial planning business Aware Financial Services Australia Limited’s own AFS licence. Aware Financial Services Australia Limited ABN 86 003 742 AFSL 238430 is wholly owned by Aware Super Pty Ltd as trustee of the fund. You should read their Financial Services Guide before making a decision. Issued by Aware Super Pty Ltd ABN 11 118 202 672, AFSL 293340, the trustee of the Aware Super ABN 53 226 460 365.
* The Canstar 5-Star Rating for Outstanding Value Superannuation was awarded in March 2020. The Canstar 5-Star Rating for Integrity was awarded in May 2020. ** SuperRatings is an independent superannuation ratings and research company. Platinum is SuperRating’s highest rating. For details on their ratings, criteria and methodologies see superratings.com.au. SuperRatings and Chant West are independent organisations. See superratings.com.au and chantwest.com.au for ratings, criteria and methodologies
2Generation Gap: Ensuring a fair go for younger Australians, Grattan Institute, page 12
3Melbourne Institute’s survey of the impact of COVID-19 in Australia 20-23 April 2020. The survey contains responses from 1200 persons, aged 18 years and over. The sample is stratified by gender, age and location to be representative of the Australian population.
4Compare the Market's Financial Consciousness Index (Ed.2) 2019, with Deloitte Access Economics