The true state of our finances has been laid bare amid the COVID-19 pandemic
Many Australians are living week to week and haven’t prepared for that ‘rainy day’ which has now well and truly arrived.
Saver HQ
Don't miss out on the headlines from Saver HQ. Followed categories will be added to My News.
One in five Australians only have enough money to get them through from one pay packet to another.
Cutting it this fine is a scary thought for many but sadly a harsh reality.
It’s been brought to the fore amid the COVID-19 fallout as people struggle more than ever before to make ends meet.
As for those with mortgages, we often hear how many borrowers have big fat buffers but this is fact – one in three are less than one month ahead of prepayments.
That’s not a whole lot.
The Reserve Bank of Australia’s biannual Stability Review is a critical document released twice a year on the health of the nation’s finances.
The latest review, released this month, says household debt levels and “elevated housing prices are longstanding risks for the Australian financial system”.
“In the period ahead, many households will find their finances under strain due to efforts to contain the virus,” the review says.
Many Australians have lapped up debt without too much worry, adopting the typical “she’ll be right” attitude.
The RBA review says some households could draw on financial buffers “including large mortgage prepayments, although many highly indebted households have only small buffers and so are more vulnerable to lost income”.
MORE NEWS
This is how quickly you can access your superannuation early
Maximise working from home tax claims
The rock-bottom interest rate environment has allowed many borrowers to pay more than the minimum amounts and scale ahead of their loans.
For many, this has been a smart savings strategy, particularly as returns on cash sitting in savings accounts have remained dismal, often earning less than 1 per cent.
Hundreds of thousands of Australians have rushed to pause their mortgage repayments for up to six months after banks announced they would allow this to help people get through the coming months.
The banks have used this as a wonderful PR move but I urge people to think carefully before doing this.
The repayments might be paused but this doesn’t let you off scot-free.
Interest charges on the debt owing still accrue during the paused period and these charges are thrown onto your mortgage once the repayments kickstart again.
Not only will it push up your mortgage costs but it could also make your loan term longer if you negotiate with your bank to extend it.
The review also pointed out most households have enough liquid assets to cover basic living expenses and current obligations such as mortgage and rent payments for three months.
But who knows how long this national and global lockdown will continue for?
What I do hope at the end of all this, is that Australians will become better money managers. This is a shock to the system that many of us have never experienced in our lifetimes and one that I believe could have a lasting impact, which hopefully some good comes from.
Originally published as The true state of our finances has been laid bare amid the COVID-19 pandemic