A sudden drop in income: What are your options?
Wednesday, 1 April 2020
Covid-19 was the disruption no one saw coming.
We talked about how it was important to have an emergency savings account. That we should plan for the proverbial rainy day.
But after ten years of 'rock star' economies, record share market highs and unemployment lows, there was a sense that many people felt we would get some warning if things were to really turn down.
But then it happened. Covid-19 forced the country into lockdown and the economy hit a wall. There are predictions that 200,000 people could be out of a job before things really improve.
**READ MORE:
* Here's what you need to know before you consider a mortgage holiday
* Here's how to buy a house if you're on a median income
* Budgeting tips when a pay rise cuts your benefit**
For many of them, it could be the first time they've experienced anything like it.
We asked some experts how to handle it.
WORK OUT WHAT YOUR SITUATION REALLY IS
When you hear that your income is going to drop sharply, your first response may be panic.
But as soon as you can, try to assess your situation as rationally as possible. What will still be coming in, what's going out and what can you change?
Financial adviser Liz Koh said people would need to look at their budget and what non-essential spending could be cut. 'Particularly memberships and subscriptions for things that you are no longer able to use. Put on hold any plans for big expenditure such as new cars and home renovations until your situation is more secure.'
He said people could also considering selling one car if they were a family who normally had two. That would give them an initial sum of money and would save ongoing costs.
Financial coach Shula Newland said people should be prepared to work out what was the most basic amount of spending they could get by on - sort of like living in lockdown even when you no longer are.
She also recommended checking for any insurance for loss of income, too. Some people have a redundancy benefit attached to their income protection or mortgage and rent cover.
BE RESILIENT
You'll probably get back on your feet faster if you can keep a positive outlook (as annoying as that is to hear).
'This is a time when it is important to have resilience – to not buckle up under financial pressure,' Koh said.
'Your attitude towards life and ability to handle big knocks will determine how successful you are. There will be some people who find it all too hard and give up. Others will see the opportunities that any crisis creates and will be flexible and resourceful enough to adapt to a new world.
'This change is so big that we all need to have a different vision for what we want to achieve in life and different goals. Spend some time thinking about what is really important to you and how you can continue to enjoy life in what will be a much different social and economic environment.
'Think about where your happiness will come from. For most people, it comes from relationships with friends and family, good health, and having a purpose in life - that is, a reason to get out of bed in the morning. This is a time for re-evaluation, reflection and the resilience needed to make big changes.'
TALK TO EVERYONE YOU OWE MONEY TO
The good thing about hitting hard times now is that a lot of people will be in the same position, and lenders have an expectation on them to treat you fairly.
Banks are providing assistance such as holidays from personal loans or mortgages - although you still will be charged interest for this period.
You may be able to access a temporary overdraft or some help to manage your credit card debt.
Get in touch with your bank early to flag any potential concern rather than waiting until you fall behind.
'Banks have a vested interest in ensuring you don't have to sell your house. Going through a mortgagee sale is an expensive and time-consuming process for everyone,' Koh said.
Other options include moving to interest-only payments, getting in a boarder if you have space or shifting out of your house to cheaper accommodation, and then renting it out (provided the lockdown is over).
You may also qualify to withdraw money from your KiwiSaver account but this should be done as a last resort because it will significantly reduce the amount of money you have available to you when you retire.
FIND OUT WHAT GOVERNMENT SUPPORT IS AVAILABLE TO YOU
You can apply for a benefit without a standdown period at the moment.
A single person aged 25 or older without children would get $250.74 a week after tax - plus an accommodation supplement if it was applicable. A married couple with children would get $428.06 combined.
But if you're part of a couple and either of you earns more than $90 a week, that will reduce what you can get at a rate of 35c lost from the benefit per $1 earned.
If your household income has dropped and you have kids, you may also find you now qualify for Working for Families.
The amount you get falls away the more you earn, but if you have two kids, you'll still get some support up to about $86,000 a year. The more kids you have, the more support you can qualify for.
You can also qualify for an accommodation supplement without being on a benefit. This also has an abatement rate – in Auckland a solo parent with more than one child can earn near $100,000 before it abates to zero.