RAINY DAY FUND PROVIDES A VITAL BUFFER
Personal finance was one of the last things people thought about when Covid struck. Now money is their number one worry, outstripping fears about the virus. The pandemic spurred 77% of Australians to be more vigilant about their spending and 54% to save more, according a survey by ME Bank.
They worry about their job security and want to protect their families, too. “I just didn’t know what was going to happen when Covid hit,” says Hayley Freier, who lives in Toowoomba in south-east Queensland.
Like many people, 39-year-old Freier agonised about her future and whether her job in the agricultural sector would be affected by the border closures. She focused on saving plus salary sacrificing into super as well as investing in broad-based exchange traded funds for the long term.
She also built up a decent emergency fund for the first time. “I have never had savings for savings’ sake before – it was always for ‘something’. So this is new to me but easy to see how important it is,” she says.
The pandemic also spurred on apprentice Shane Allison, from Perth. “I want to make sure I am financially secure and have a good job,” says the 23-year-old.
He cut his spending, saved harder and bought shares in companies such as JB Hi-Fi, Macquarie Bank, Telstra and boutique brewery Gage Roads Brewing. “I have been going out less and I’ve reduced non-important essentials,” he says.
Allison was surprised to find his work increased under Covid. What he didn’t expect was Perth property prices to rise, and he worries this will make it harder to afford a home. He has a second job on the weekend, running a gardening business, to save extra money.
As many as 52% of Australians improved their finances between February 2020 and November 2020, according to the Commonwealth Bank. The pandemic spurred many people to get their finances in order: saving an emergency fund, drawing up a budget, slashing expensive habits, sticking to a spending plan and becoming smarter about their spending by scrutinising plans for utilities.
Perhaps it isn’t surprising as there was less to spend
money on: travel, transport, eating out, operating cars, smoking, recreation were all cut.
As well as spending less, many households requested a freeze on their home loans or a reduction in rent. They were helped by social welfare payments such as JobKeeper and JobSeeker, plus free childcare for three months.
“In some ways, some families have had more money with government handouts,” says Jonathan Philpot, partner of wealth management at HLB Mann Judd.
Covid also triggered a huge re-evaluation of financial plans with 54% of people changing their financial strategy. On their list of adjustments were retirement plans, mortgages, insurance and superannuation as well as investments in shares, cash and property. These may change in 2021.
Downsizing bonus
But many people struggled over the past year, particularly younger and older Australians. They have suffered job losses, reduced working hours and slashed salaries. One in seven asked for a pause on their rent or mortgage payments, one in five asked for financial help from friends or family and one in eight had asked for help from a welfare or community organisation, according to research by the federal government’s Australian Institute of Family Studies. Take the case of Michele Mossop, photographer, who lost her conference work for global financial companies and photography for different media companies. “Everything took a nosedive through March. I thought, I’m not going to have any work and I’ll eat into my superannuation. I thought the value of my home will take two or three years to go back up.”
Around 42% of over-55s had their work hours cut and 30% of over 55s say they will stay in the workforce longer, according to work by Susan Bell Research.
Mossop’s work options dried up. Like 30% of the over55s, she worried about what she should do. “I thought it would take three years to recover, like the GFC.”
At around the same time, a persistent real estate agent contacted her to see if she would sell her two-bedroom apartment in a seaside suburb of Sydney. Mossop had long thought of selling up in her retirement, swapping her Sydney lifestyle for a tree or sea change and unlocking some funds for her retirement. The pandemic brought her plans forward and she sold for a good price.
At first she looked outside Sydney, up and down the coast, while renting a one-bedroom apartment. “They were largely holiday towns, alive for the summer but dead the rest of the year. I didn’t need a five-bedroom house. Everyone thinks Airbnb is the answer, but it isn’t.”
So in the end she bought the one-bedroom apartment on the coast that she was renting, pocketing a third of the money from her two-bedroom place which she plans to keep her going for several years.
Brighter outlook for yields
Who would have guessed the sharemarket would recover after a 40% plunge in just eight months? It surprised financial planner Jonathan Philpot, given that after the GFC it took three years to bounce back.
Nervous investors such as Ria Young switched from shares to cash so they could sleep at night. But the sharemarket rebounded so quickly that the problem now is finding the best time to buy back in.
“I had big plans on buying and holding stock last year. I watched the start of the downturn in February and sold my remaining stock around February 28. Since then, I only purchased TechnologyOne when I thought it was going up, but it went down. My money is sitting in the bank with very little interest,” says Young.
Philpot says that when the cash rate plunged to 0.1%, it was the last straw for investors, particularly retirees. “They realised they were effectively getting no return on their fixed-interest investments such as term deposits.”
He tells his clients that at least the sharemarket delivers an annual income of 4.5% through dividends, including franking credits. There are predictions that dividends will be stronger. Jun Bei Liu, portfolio manager of the Tribeca Alpha Plus fund, predicts yields will rise by 30% in the coming year, largely as a result of expected whopping payouts from big mining groups such as Rio Tinto.
But investors can expect plenty of volatility this year, warns Martin Conlon, head of Australian equities at Schroders. “As 2020 drew to a close, the announcements of vaccine rollout plans in major economies sparked a turning of the tide, with many investors seeking out companies with more reasonable valuations,” he says.
Property pressures
While some investors turned to property for a better return than the cash rate, Philpot tells his clients that the yield is often half of that from the sharemarket. Gross yield is around 3% before costs. “Not a great yield. Also investment properties have seen an increase in vacancies, fall in inbound tourism and downward pressure on rents,” he says.
With interest rates so low, negative gearing is virtually gone. “It is hard to get into the negative gearing position. The tax reason isn’t there,” says Philpot. “Also, with property you need to own it for 10 years because of transaction costs.”
Some of his clients have downsized and relocated out of Sydney, largely for family reasons rather than financial ones. “They have used their family home as a cash box and a couple can put $300,000 each into superannuation as a downsizer contribution.”
Investors have found inner-city investment properties hard to rent or are having to cut rents by 20% or 30%.