Coronavirus has turned the world upside down and created a level of uncertainty that makes longer term thinking seem irrelevant.
Sadly, for some of our clients there has been severe shocks to business, careers and jobs. Thankfully, to date at least, there have been no tragedies among our clients. Unfortunately, colleagues in Victoria have had a much bleaker experience.
Government intervention and financial assistance has certainly helped cushion the economic fallout, but at some stage this will have to either reduce or cease. Hopefully, the world and Australian economies will be recovering before that occurs, but we all need to look at the ramifications of this deep downturn.
We are not economists, but common-sense dictates that when you spend (a lot!) more than you earn, a large debt accumulates. It is true for households and it is just as true for businesses and governments.
Apart from bankruptcy, the only real way back to solvency is by earning more than you spend. If your earning capacity is limited, then it follows spending must reduce. From a government perspective, it is difficult to see where the higher earnings will come from in coming years, so reduction in expenditure and services seems inevitable, even if not very desirable.
This means households and businesses must strive for self-sufficiency. If we expect nothing from governments, any benefits will seem like a bonus.
This can be viewed in three broad pools, with differing needs and strategies that could be applied.
Most young families have significant debt, coupled with work interruption and or education expenses while raising children.
This limits the ability to “get ahead”, but wherever possible extra repayments should be made in an effort to reduce the debt and provide a buffer in case harder times hit. While banks have so far provided short-term relief for struggling borrowers, this is simply compounding the interest bill and again it cannot last forever.
Middle aged accumulators
At some stage, the debt load is eliminated or is less daunting and the children are relatively independent. This is a period of life where you are generally at the peak of your earning capacity, with great careers or profitable businesses.
Unfortunately, the opportunity to convert this good fortune to significant wealth is often squandered. It is understandable that someone who has been financially stressed while raising a family and paying off a home loan, would like to enjoy the freedom of being able to spend as and when they like.
However, once you spend at a certain level, it is difficult to reverse the trend. A compromise is necessary if long-term financial security is important to you. This can be as simple as maximising all superannuation contribution limits and or commencing a regular investment program.
The third pool is comprised of those who are retired. In this situation, income is derived solely from investment and government assistance, so upside is more limited as far as earning capacity.
Therefore, concentration must be on expenditure. The more we spend, the bigger the impact on our remaining capital. Spend too much and you may outlive your capital.
However, it is also very important at this stage to be sensible about how severely you should restrict your budget. Many retirees already live within their means. Further restriction may only result in the estate being larger! So a balanced approach is required.
It is our role to put this in perspective, to ensure that you are enjoying life to the full in the short term, but also can be reassured that in your latter years you will remain financially secure.
In summary then, the strategies that should apply during a coronavirus pandemic are strangely similar to the strategies that apply in all other conditions. Certainly times are worrying, but in financial terms are they any more worrying than the global financial crisis, the dot com bubble, the 1987 stock market crash, the 1970s oil shock etc?