BEAT THE BUDGET BLUES

How to manage your cash flow during Covid-19

As this issue hits newsstands in June, Australian states and territories will be working through their plans to help us navigate our post-pandemic life. While we can’t predict what the new normal will look like in its entirety, we can be certain there will be short-term and long-term financial pain for millions of Australians. The immediate economic impacts are there for all to see. Look beyond the billions of dollars in government support and already there’s a clear picture of how Aussies are faring with their finances. Between the start of the pandemic in Australia in late January and the first week of May, at least 643,000 loans had deferred repayments, totalling about $200 billion. According to the Australian Banking Association, more than 392,000 of these were home loans, so it tells us that homeowners are feeling the pinch. The Australian Bureau of Statistics (ABS) says a third (31%) of households reported their finances had worsened between mid-March and mid-April, while 14% reported an improvement. And compared with the ABS’s 2017-18 National Health Survey, “almost twice as many adults reported feelings associated with anxiety, such as nervousness or restlessness” during the four-week period. But among the gloomy statistics, there are some shining lights too. A separate ABS survey says 81% of Australians believe they could raise $2000 for something important within a week. Then there are the stats that tell us Aussies are conscious about their financial problems and are taking steps to address them before major trouble strikes. Research from comparison service Compare the Market says about twothirds (64%) of Australian households experiencing reduced income as a result of the pandemic will stop or restrict their credit card use. And more than threequarters (77%) of this cohort will draw on their savings. No matter which way you slice and dice the good and not-so-good figures, it’s clear the pandemic will force us rethink our finances and in many ways it will change the way we manage our household and business budgets. In March we gave you the plan to restart your finances if you lost everything after the bushfires, drought and floods; in April we gave you the plan to grow your wealth when you can afford to do so; and in May we gave you the immediate ways to financially survive Covid-19. Now we’re giving you the new budgeting rule book to steer you through the recovery and beyond.

THE NEW NORMAL

To balance your income against your expenses is the first rule of budgets. Write down what money you have and what money you’re expecting to come in; then write down what money you owe and who you owe it to. It sounds simple enough, yet several studies show Australians fail to budget.

Nobby Kleinman, money mentor and author of Money Rules, says during his 30 or so years working in personal finance, Aussies have always known how to create budgets. They know to spend less than they earn and to pay the highest-interest debt first – but they don’t always know how to go about it. And it’s where the best-laid plans come undone.

He says budgets fail when you only concentrate on the piece of paper in front of you. “People think budgets are only money in and money out, and if that’s all it is then they’re not giving up their glass of wine on a Friday night.”

But budgets are so much more nowadays. And it’s time to remove the stigma that budgets mean you have to lose significant parts of your lifestyle.

A common conversation Kleinman has with couples and families includes reducing their monthly expenses. Instead of spending $100 each week on takeaway meals delivered to your home, why don’t you spend $150 one night a month and make it a date night?

“We’ve just saved them $250 a month or $3000 a year,” says Kleinman. “You don’t have to cut going out for a meal. You don’t have to cut out spending on clothing. Whatever it is you enjoy, you keep doing. But if you’re prepared to make [lifestyle] changes, think about what impact it will have.”

Serina Bird, money blogger and proud “frugalista”, wrote on Money’s website in April that she believes a frugal lifestyle is the new normal. She says her frugal lifestyle choices – such as baking at home, cycling and playing games with her family at home – have been embedded for years and proven fruitful during the pandemic as frugality enjoys a renaissance.

Matt Morrison, author of Freedom, Lifestyle & Legacy and financial adviser at The Practice, says the frugally natured are in many ways better positioned as we rebound from the pandemic because they’re making better decisions about what’s necessary from an expenses point of view. “And if they maintain that simpler lifestyle, they might have greater savings ability when we’re out of this current situation.”

CLEAR THE BUDGET CLOUDS

Finn Kelly, financial adviser at Wealth Enhancers, says there’s more to be gained by having a friend or an adviser look over your budget line by line. This can include checking bank and credit card statements too because there will be expenses you’ve forgotten or overlooked.

“Straightaway you can identify some easy wins,” says Kelly. “We’re in a subscription world these days and when times are good we just rack the subscriptions up and then suddenly we realise, ‘Oh, I didn’t even know I was paying that anymore’ or ‘Wow, that’s a really big phone bill and I saw an ad on TV the other day that’s offering an unlimited package for $30’.”

He says an independent person looking over your budget can be a great way to also have proper conversations about where your money is going. They’re likely to tell you you’re paying way too much for a certain product or service. Once you have that clarity, you have to draw a line in the sand on your expenses, says Kelly.

The line becomes even more important for the millions of people living payday to payday. Kleinman says the pandemic has also shown how close people have lived to the poverty line and the full effects of financial trouble won’t be felt for at least another three months as gov

ernment support winds down and loan deferments lift.

Morrison says studies have shown that more than 80% of people spend everything they earn and 9% spend more than they earn through credit cards and personal loans. Now the pay has stopped and quarterly bills are about to arrive, there are people who are going to need a plan B … and fast. (See table, left).

He says the quarterly, half-yearly or annual bills are the ones that often derail the best laid plans.

“You think you’ve got your cash flow under control and all of a sudden you’ve forgotten this annual bill,” says Morrison. “I do encourage people to think in terms of their monthly cash flow. Most financially successful people really think in terms of monthly expenses and monthly cash flow. They certainly have a longer-term view, but they break it down to monthly instead of weekly and fortnightly expenses.”

His tactic to make this work involves liaising with your utility providers (or whoever you pay bills to) and making monthly payments through direct debit. He says this evens out expenses over time rather than getting hit every few months with bigger bills that could eat into your savings. It also saves checking up on bills weekly or fortnightly.

Kelly prefers a weekly budgeting method – and if you become even more in tune with your finances, you can break them down into daily micro-budgets.

He still likes the idea of having three accounts (or buckets) where your income is divided into savings, investments and personal spending. However, he feels a month can be too long if you’re really trying to get on top of your finances.

“The damage is already done within a month. One bad month and you can wipe out your savings,” he says.

Collectively the advisers say that budgets are more about placing positive constraints on your lifestyle and empowering you to take control of your money. Budgeting

gives you more financial freedom because you know where you’re money’s going and it’s not being wasted.

PUT YOUR BUDGET TO WORK

Nobby Kleinman says if you’ve put every dollar to work in your budget and there’s no more income on the horizon, then it’s time to start thinking about alternative sources of income.

He asks clients what they know from the training, education or experiences they’ve had over the years. He then asks whether the client can create a course that teaches other people and whether they could sell it.

“Even if it’s producing $20 a day you start adding that back into your budget and you can see what it’ll look like,” says Kleinman. “You could work more hours and get another job or create ebooks – do something where you can charge people for your knowledge and ask yourself what that would be worth.”

He says people often work tirelessly just to maintain an income, but this doesn’t mean you can’t find other streams of income in your regular job – and employers would generally be grateful.

Matt Morrison says the temporary shutdown of businesses has forced several of them to finally go online or accelerate other projects that had only just started or were hanging on to be completed.

Financial adviser Kelly says he has seen people with corporate skills share their knowledge and expertise with others who have different skill sets, and vice versa.

He sees the post-pandemic period as a time for the mini entrepreneur. “You need to learn these skills right now because, unfortunately, bigger companies won’t necessarily bring back a lot of people.”

TOUGH FOR BUSINESSES

Tristan Scifo, financial adviser at Purpose Advisory, says he saw a lot of sole traders who were strapped for cash and mostly living payday to payday during the peak of the pandemic.

While sole traders can be eligible for the JobKeeper payment, Scifo says it’s still a big financial stretch for many business people. “A lot of them have moved house or moved back home; they have done what they need to do to make their budget work. And they wouldn’t be spending much,” he says.

Among small businesses, Scifo says it wouldn’t be uncommon to see a scenario where an owner who manages a team of five to 10 people has been running the business threadbare – say with a $10,000 credit card overdraft.

“They haven’t been able to pay their employees in order for them to get the JobKeeper because you were supposed to have paid wages by a certain date [and then the ATO pays in arrears],” says Scifo. “Some businesses

that only get enough income to pay their staff wages haven’t taken up JobKeeper because they didn’t have the cash flow to make it work.”

He says other businesses might be doing okay for the time being but they’ll find the next few months really tough. Once they’ve paid their staff (who, while receiving JobKeeper, might be earning more than they usually do), the money collected from the ATO in arrears might be used to pay for other debts and expenses, creating a cycle where it’s hard to level the balance sheet again.

In the business world, owners like to plan and budget well in advance, says Finn Kelly. However, these same plans and budgets have “just gone rapidly short” and “if you don’t make some short-term pivots right now, you might not have a business in three to six months”.

“Cash is king and the most important thing right now for small businesses,” he says. “The first thing I’d be looking at is whether you’re owed any money. If you are owed money, you need to do everything you can to get it and the best way to do that is ask for it – call people and ask. Generally most people will act on it straightaway.”

Both Kelly and Morrison say it’s here that there are close similarities between personal and business budgets.

Morrison says he finds that small businesses are generally running some form of budget but there will definitely be some that didn’t realise how crucial it was until now.

He says if a business was to readjust its budget, it should treat it like a personal budget. “Look at what

commitments or financial obligations you have with the bank, whether it’s mortgages, car leases or car loans and really explore all options.”

He says businesses that don’t have a cash buffer but survive the pandemic and tougher economic times will look to have savings in the future.

Kelly says after making sure money owed to the business is on its way, the next thing he would do is look at all expenses, line by line. “Businesses are worse than individuals – there are so many different technology subscriptions and they creep up.”

You need to stop and ask whether certain expenses are really contributing to the business’s revenue growth. If they aren’t, cut them – although cutting costs can only carry you so far.

He suggests providing your staff with regular updates of how the business is faring with its cash position because this way everyone can work together and pinpoint areas where improvements are possible, including revenue streams.

“Then [business owners] need to think again, ‘How do I get more revenue? How can I add more value?’ Create a pivot and go 180,” says Kelly.

Money magazine has been running a series of articles online that look at businesses that have changed course during Covid-19. The series, Making It Work, has covered businesses that now do drive-through weddings or live-streaming of funerals, restaurants turned grocers and even an opera singer who became an online physics teacher.