Facing a cash crunch? Let's go back to the drawing board...
In the face of rising interest rates and the increasing cost of everyday items at the supermarket, more and more households are finding it harder to get by.
Many New Zealanders are finding themselves back at square one, redesigning their personal budgets in hopes that they can free up some funds. While this task may appear daunting, it also provides an opportunity to weed out some unnecessary spending and shed a light on areas where improvements could be made.
So, what do you do about it? – A good start is to take a deep dive into your personal finances.
A personal financial plan is insightful and often holds answers to help bridge an income and expense gap in challenging times.
The ABCs of Budgeting
The first step would be to start drawing up a budget to understand your cashflow. It is crucial to look at or revisit the numbers. A personal budget should be as simple as ABC…
- Household income per fortnight (check your payslip for your pay cycle).
- Minus all fortnightly necessities (food, bills etc.).
- Minus all fortnightly luxuries (coffees, Netflix, gym etc.).
A bank statement dating back three months is usually a good starting point to check various spending items.
This exercise helps take back control over your money; weeding out any overspending and prioritising expenses, which helps to create emotional security and much-needed communication about money in the household.
Optimising Your Personal Insurance Plan
The next step would be to check any personal insurances you have in place (life, income cover, trauma, and health insurance etc.) Personal insurance provide you the much-needed financial protection in times of various life-changing events like death, untimely ill-health, and subsequent disability (off work long-term). A robust insurance plan is an essential element of your personal financial plan. It could also offer options to mitigate short-term personal cash crunch as well. Such as::
Restructuring your premiums can help create short-term affordability for long-term cover. Stepped premiums usually have lower payments that gradually increase with age. However, a level premium has a higher payment but does not go up every year with age and remains at one level up to a certain age.
Adjusting the wait period can also reduce insurance premiums. The longer the wait period on benefits like income cover, the lower the premium. Although, it is important to note that a longer wait period means creating greater provisions to support living expenses (do you need a bigger rainy-day fund?).
Private health insurance excess is a useful tool to manage the cost of your health insurance. As health insurance costs increase with age, so adding or increasing an excess on your health policies can be a great way of achieving more affordability with your premiums. A higher excess will imply that we have earmarked a portion of your savings to pay a higher excess if required.
Reviewing optional benefits and checking for multi-benefit discounts and exclusive discounts will help you evaluate various bells and whistles that may be added to insurance policies. Optional benefits are great for comprehensive insurance coverage, however, they are not ‘one size fits all.’ This means that based on individual situations, additional benefits like buyback, future insurability, booster options, and caregiver benefits need to be considered to restructure insurance policies. Moreover, insurance providers may offer discounts for multiple benefits in a policy. They also run specific offers like rural discounts, healthy lifestyle discounts, and periodic campaigns.
Tip: Avoid double-ups and check if you have subsidised insurance benefits from your employer. Such benefits will not only help free-up cash but also provide cover for pre-existing conditions.
Two options that should be thoroughly discussed with a financial adviser are premium holidays and suspensions as they may not be suitable for every situation.
Terminologies may vary, but generally, a premium holiday means you can stop paying premiums for up to 6 months in case of loss of job or financial hardship while keeping the insurance cover in place. This option may not be available with all insurance providers, so it pays to work with your financial adviser.
Meanwhile, a premium suspension suspends premiums for up to 12 months. However, there will be no insurance cover during the suspension period. This obviously leaves you financially vulnerable for a period, so must be considered very carefully.
KiwiSaver offers short-term options that can infuse cash into your personal finances.
Harnessing Your KiwiSaver Scheme
The third step is to look at your KiwiSaver scheme. KiwiSaver offers short-term options that can infuse cash into your personal finances. Let’s look at some of these options:
Salaried individual contributors can apply for a savings suspension ranging from 3 months to 12 months if they have been a contributing member of KiwiSaver for 12 months or longer. However, new members (less than 12 months) will need to provide IRD evidence of financial hardship. There are disadvantages to this however and should be considered carefully.
Contributions for self-employed KiwiSaver members can be adjusted to a minimum 3% from a higher level of contribution For an immediate short-term solution, this will mean an increase in take-home pay, however, it is not suitable for everyone and may impact long-term retirement savings.
There are other options available to access KiwiSaver funds such as significant financial hardship, serious health reasons, paying a tax liability or student loan and there are options available for funeral costs of a dependent family member. These options all come with conditions and a comprehensive application process which is best to work through with the assistance of a financial adviser.
Taking control of your financial well-being encompasses several key steps. It starts with the essential task of prioritising your expenses and fostering open communication within your household, laying the foundation for emotional security.
To safeguard against unforeseen circumstances, securing a personal insurance plan and the options available for that plan becomes paramount. Alongside this plan, take a closer look at your KiwiSaver scheme, examining options that may be available. Keep in mind that seeking guidance from a financial adviser will provide invaluable insights as you navigate these decisions, ensuring a well-informed approach to your financial journey.
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Disclaimer: This article has been prepared for the purpose of providing general information, without taking into consideration any particular person's objectives, financial situation or needs. Any opinions contained in it are held by the author as at the report date and are subject to change without notice.
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