FIVE BIG MONEY MISTAKES FOR 2020

Don’t panic-switch, don’t take a holiday you don’t need, writes Susan Edmunds.

When every week brings news of job losses and business failures, it’s easy to feel panicked. But a national – or global – economic downturn doesn’t have to mean a financial disaster for every individual household.

Here are five Covid-19 money mistakes to avoid if you want to make it to the end of the year in the best shape possible.

Going on a mortgage holiday if you don’t need it

New Zealand’s main banks are all offering the option of a ‘‘mortgage holiday’’, which puts mortgage payments on hold for six months if borrowers have been affected by Covid19.

NZ Bankers’ Association data shows the offer has been taken up by

55,000 consumers, who hold loans worth a combined $19.5 billion.

This can be a good option if you’re struggling to pay the mortgage and could fall behind on it otherwise. But it’s not something to do just for the sake of it or just because you think you might need it – the interest that you would have been paying still adds up, and it either makes the payments higher for the rest of the loan, or extends the time it takes to pay back.

A six-month repayment holiday would add about $15,000 to the cost of a loan for someone with a $500,000 mortgage at 4 per cent, or about an extra $72 a month once payments began again, according to financial research site MoneyHub.

Some have criticised the holidays as a money-maker for the banks.

New Zealand Bankers’ Association chief executive Roger Beaumont rejected that.

‘‘They’re doing it to provide immediate loan relief to customers in need who have been financially affected by the pandemic. It gives them the ability to defer all loan repayments at an uncertain time, and interest continues to accumulate. Banks are responsible lenders and suggest customers only defer all loan repayments if they need to.

‘‘There are a number of factors at play here. Some customers who deferred their loans are already back on track with their repayments. That shows people know how deferrals work and that it’s a good idea to restart payments as soon as they can.’’

Withdrawing from Kiwisaver if you don’t need to

Generally, it’s hard to withdraw money from KiwiSaver on hardship grounds but more people are turning to their retirement savings accounts for help.

There was $14 million withdrawn from KiwiSaver accounts for hardship reasons in April and $12.95m in May.

Financial adviser Tim Fairbrother said KiwiSaver withdrawal should be a last resort.

‘‘If investors take money from an investment, it will dent the one thing that lots of investors don’t understand – compound interest. Albert Einstein named it the eighth wonder of the world. He said ‘he who understands it, earns it; he who doesn’t, pays it.

‘‘Compound interest is the addition of interest to the principal sum of a loan or deposit; in other words, interest on interest. So the more investment you have without taking a hardship withdrawal, the more you will have more at retirement.’’

Switching your Kiwisaver Markets have been volatile since March’s dramatic fall. It’s hard to watch your balance wobble but when you’re in a long-term investment, you need to stick it out. People who switch when markets fall just lock in their losses and can end up a lot worse off over the long term.

Trying to pick the market bottom Many people are being tempted into investment markets by the promise of ‘‘bargains’’ while economic conditions are poor. Investment platform Sharesies hit $500 million in investor money under management in midJune. A survey by economist Tony Alexander showed that a net 8 per cent of people expected to spend more on investment property in the next three to six months.

The problem with buying any investment just because you think the market is low and you might make a quick profit is that you could well be wrong. The market might have further to fall. It might improve, then fall further again. Timing the market is so tricky that even professionals whose job it is to watch the market all day don’t always get it right.

If you’re investing, look for something with sound fundamentals and that you are prepared to hold on to until things finally do improve again.

Jumping at sales

It seems that every other retailer is having a big sale at the moment with dramatic discounts on pretty much everything you can think of. While we’re being told that propping up our local businesses is our patriotic duty, it’s also important to ‘‘put your own oxygen mask on first’’. Make sure your own finances are in order, and that you could handle any further financial disruption, before you splash out too much.