The slowing global economy has forced some households to rethink financial plans for 2021 and beyond, so we asked Mark Raberger, Head of Health at MetLife Australia, and Glen Hare, a financial adviser at Fox & Hare, to share their thoughts on making adjustments.
When one partner is suddenly contributing less to the household income, what are some of the first things a couple needs to think about?
Mark Raberger: Mental wellbeing is really important, so it's worth having a frank and open conversation about how you're both feeling emotionally. It's common for people to feel anxious so it's good to acknowledge those feelings and support each other. We know there's a close link between a person's financial situation and their mental health, so it's useful to talk with someone about managing that. Some couples might be able to handle the financial conversations themselves but it's also useful to talk with a trusted adviser.
What are some of the big questions financial advisers can help couples with?
Glen Hare: We always go straight to cashflow: how much will the loss of income impact the household's spending? So, first, we look at the impact on fixed costs, including mortgage, bills and debts. Can these be covered by one income? For our members who have experienced loss of income, we've helped them reduce their regular investment strategy. While they're not adding more to their investments, we're really upfront about avoiding selling what they've already built up to cover cashflow shortfalls. There's still the focus on working towards long-term goals, including retirement savings, paying off a mortgage or putting money aside for your children's education.
We then look at ways to reduce payments on loans and reduce credit card debts. It might also be possible to have a conversation with the bank about financial hardship.
Then we look at discretionary spending: it's often fairly straightforward to find savings by cutting back on subscriptions to streaming services, for example, or cooking at home rather than ordering from a restaurant.
Finally, we explore larger lifestyle decisions, which can be about choosing more affordable alternatives for everything from entertainment to aspirational things like holidays or new cars.
How can people cope with the social challenges of having less discretionary spending?
Mark: When a household has less discretionary spend, it can mean people may isolate and not interacting with their colleagues and friends and family as often as they might normally. That can have a significant impact on the person's mental health, which may make them withdraw, because they might feel embarrassed about their situation. But they shouldn't.
Money can't buy everything: you don't need money to maintain contact with friends and colleagues, and those relationships can help people get through challenging times.
During the COVID-19 lockdowns, a lot of people cut back on lifestyle expenses such as going to restaurants. A lot of us experienced substantial changes, and there are positive lessons in that experience: remember, we’re all in it together and we'll get out of it together.
We know spending time with people who love and support you is more important. I think visiting friends for a barbecue or dinner is just as good as meeting them at a restaurant. In our family we've had more time together enjoying things like movies and board games at home instead of going out and it's been really positive for our relationships.
If there's anything positive about the pandemic, it's that stronger focus on relationships. What financial lessons can we draw from this experience, too?
Glen: I think we'll see more people decide they don't need to spend two hours commuting every day and that can mean they'll have more savings. We've also seen a lot of people become more proactive about how they manage their finances.
More people are trying to get their households in order, from a financial perspective. And it's something that maybe they just put on the back burner prior to COVID-19.
On Mark's point, the conversation for people about not spending what they previously did can be quite an exciting one: you're already saving by not commuting and eating out as much. Not spending on instant gratification or big-ticket items like European holidays (because we can't fly overseas anyway) might bring some of your long-term goals a little bit closer.
What are the implications of cutting back on insurance costs?
Mark: During the pandemic, we saw more people pulling out of all sorts of insurance designed for long-term protection, which is concerning. In some instances, people rate car insurance as being much more important than their life and health insurance.
I understand a car can be seen as precious, but life is much more precious.
If someone becomes critically ill or loses their life, then there's a big risk their family is left with nothing to pay off debts and have money to live on.
Glen: We've had a lot of conversations with our members – particularly our younger members – about the importance of long-term cover, such as life and income insurance. Our younger members are often in that mindset Mark mentioned of thinking car insurance is more important. Some of the questions we ask are: “If the worst happens, how are you going to pay off your car or cover your car insurance if you don't protect your income? And how are you going to pay off your home?” So many people in their 20s and 30s don't think about those implications.
It's useful to understand insurance as something that covers you in the short and long term. We have found our members are more open to thinking about long-term insurance, though, when they're taking out a mortgage or starting a family, so that's a positive.
We spend a lot of time educating our members about different types of insurance and factoring the cost as a fixed cost, not a discretionary spend. Because that's what it needs to be.
How can people manage uncertainty?
Glen: Communication is paramount in all facets of a relationship, including being able to openly talk about finances. The household's financial goals are joint goals, so even though there might be one person who typically does more work managing the finances, that doesn't mean the other has no idea what's going on.
The pandemic and the economic downturn are blips in a very long timeline. Uncertainty is possibly one of the biggest impacts on one's financial wellbeing.
So, if circumstances do change, take a proactive approach in working out what financially needs to change: what are the non-negotiables we have to pay? What are the discretionary costs we could cut back in the short term or entirely if we need to? What other goals can we set so we have more to look forward to?
Mark: I think everyone is affected, whether they're in work or not. We're possibly all going to experience bumps in the future, so a big thing we can do to help manage the situation is focus on our health and hopefully mitigate some of that risk.
Looking after your mental health is as important as looking after your physical health.
It's very useful to openly share your feelings with your partner, family and friends about where you're at and what you want to do. Talking about the future, even if the future is uncertain, can uncover good ideas for changes in your life to improve it. Your goals might adjust along the way though having goals is great motivation. And looking after each other helps motivate all of us to make positive changes.