How to protect your flock in tough times
When you’ve lost your income it can be hard to know just what you should be spending your money on. The Barefoot Investor reveals three simple steps to help you get through the coronavirus crisis and why a “loan holiday” may not be the best thing for your mortgage.
Barefoot Investor
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I picked a tough time to change careers.
Last year I went back to study so I could become a community-based financial counsellor.
In January I was sent off to help survivors on the bushfire front lines.
It was the hardest thing I’d ever done.
Then came COVID-19.
Right now I find myself on the financial front lines as a counsellor.
Let me tell you a couple of things I’ve learnt from sitting across the table from people who are financially broken:
The first hour of the meeting is often a write-off. The client will tentatively sit down … and then verbally vomit at me. Nothing makes sense.
That’s because they’re consumed by fear. They’re ashamed about their situation. They feel out of control.
Understand this: no one makes good financial decisions when they’re in a state of fear. No one.
And, right now, a lot of people are consumed by fear.
I can see it in the thousands of emails I’m getting each week.
They stay up late “doom scrolling”, which makes them worry about getting sick … and dying.
Or they worry that the economy is going into a recession … or a depression. Will we be shut down till June? Or Christmas?
Fear is debilitating. It freezes you up and shuts you down.
So what’s the antidote?
You need to take action … alpaca style. Let me explain (it’s kind of weird): A few years ago we inherited two alpacas, whose job it was to protect our lambs from foxes.
They’re surly buggers … they’re basically camels without humps and as aggro as Alan Jones.
When the bushfire came through our farm and burnt most of the flock, a ranger turned up the next day with a gun to finish off the wounded sheep.
The alpacas were wounded themselves. Their burnt hoofs made it hard for them to stand. But they did.
They shielded their sheep. They stared down the barrel of a gun … and charged at the freaked-out ranger.
No one was messing with their flock! And in a time of crisis, when you’ve lost your income, you need to do the same. Every dollar you get should go first into protecting your flock:
You put food on the table.
You keep the lights, heating and internet on. And you keep a roof over your head. These are non-negotiables.
If you have money left over you can make repayments on other debts, but these are your priorities.
Here’s how you do it:
FIRST, work out how much your basic needs (above) realistically cost each week. Write down the figure.
SECOND, go through your bank statements and cancel your direct debits and other non-essential payments.
THIRD, email your creditors, explain your situation and request a payment extension. You won’t solve everything quickly, and you shouldn’t expect to. That’ll come later.
Right now, your only job is to protect your flock.
Tread Your Own Path!
Q & As
THIS IS SUPER STRANGE
GRACE ASKS: I’m a 27-year-old with my super in Hostplus. I got an email from them talking about “unlisted assets” which, to be honest, made no sense at all.
Can you please break down what this means for me as someone with my super in the indexed balanced fund.
BAREFOOT REPLIES: My guess is that they’re talking about their balanced fund, which has a lot of unlisted investments (i.e. they aren’t traded on a stock market).
None of this applies to you.
Since you’re in the indexed balanced fund (like me!), you have zero exposure to unlisted assets.
Now, I know the funds sound the same, but they are very, very different beasts.
Let’s compare the pair:
The balanced fund has high fees … more than 1 per cent.
The indexed balanced fund has very low fees … it’s the cheapest pure play index fund in the country, with fees at 0.05 per cent. (That’s more than 20 times cheaper.)
The balanced fund has 37 per cent of its investments in illiquid investments that are hard to price, and hard to sell in a pinch.
The indexed balanced fund is a very transparent portfolio, made up entirely of index funds, which are priced every business day. There’s a lot of uncertainty right now, but you don’t need to worry about unlisted investments.
And that’s because you don’t own any.
SHOULD I PAUSE MY REPAYMENTS?
ADRIAN ASKS: I haven’t lost my job due to the coronavirus (I have a stable public service job), but I’ve seen an option from my bank to freeze my home loan repayments. Would it be a good idea to build up a bit of extra cash in this uncertain climate?
BAREFOOT REPLIES: You’re right, banks and other lenders are offering their affected customers the ability to stop making home loan repayments for up to six months.
I’ve seen some people call it a ”pause” or a “repayment holiday”.
It is neither. It is the financial equivalent of being stuck in a taxi while in a traffic jam:
You’re not going anywhere, but the meter is still running.
The interest on your debts, and the fees and the charges, are all still ticking over. Tick, tick, tick.
Understand this: your debt is growing higher each and every day you delay.
My thoughts?
Now is not the time for you to forget about where you’re going, suck your thumb and look aimlessly out the window. Instead, it’s time to focus relentlessly on your final destination: getting the banker off your back and becoming debt free!
So, if you’re still employed, you should consider making extra repayments.
Here’s why: As a result of this crisis, the Reserve Bank has slashed interest rates to their lowest in history. Even better, they’ve said that they could stay at these “emergency levels” for the next three years.
In other words, this is an amazing opportunity for you to smash a huge amount of debt over the next few years.
Just remember that when it comes to the banks there’s no free ride, mate!
I LOST MY JOB THIS WEEK, BUT I GOT THIS
JILL ASKS: I wanted to get in touch with you to say thank you. I lost my job this week. Previously this would have been a devastating blow for our finances. However, thanks to reading your book three years ago, my husband and I are now in a very strong financial position. We have paid our mortgage down by half, and we have a good amount of Mojo in the bank. Now we are able to focus on our kids in this scary time.
BAREFOOT REPLIES: What a strong position you’ve put yourself in. Congratulations!
You’ve also made a really important point about focusing on your kids. Don’t think your kids aren’t watching you very closely.
Generational attitudes to money are being forged around the family dinner table right now.
So let them know you’re in a decent financial situation because you sacrificed in the good times.
Drill it into them.
You’re sorted, Jill, but what about all the parents reading this now who are really stressed about their financial situation. What should they do? Well, some parents will try to shelter their kids from the financial reality of this situation.
Yet kids are smart: they pick up on what’s going on.
It’s OK to be worried. Just channel that fear into something that will serve your kids, like saying to yourself: “Things may be tough now, but we’ll get through it. And never again will this family be financially vulnerable. It starts today.”
You got this!
If you have a money question, go to barefootinvestor.com and #askbarefoot
The Barefoot Investor holds an Australian Financial Services Licence (302081). This is general advice only. It should not replace individual, independent, personal financial advice.
The Barefoot Investor for Families: The Only Kids’ Money Guide You’ll Ever Need (HarperCollins, $29.99)