From Europe to unemployment, what are the biggest threats to your finances for the next 12 months, and how can you protect yourself and your wealth?
If you believe the world is going to end this December, you’re probably not all that worried about longer-term financial protection and prosperity.
In fact, you’ve probably already sold your assets and purchased a one-way ticket to South America so you can feel at one with the Mayans when the sky falls on 21 December.
However, if, like most other people, you expect life on earth to go on for a few more million years in one form or another, there are some real and present dangers that may not claim your life but could have a big impact on your financial well-being.
So here are Your Money Magazine’s top six financial threats for 2012, and the strategies you can use to keep your financial affairs well-oiled over the next 12 months.
1. Euro meltdown
One day the markets are buoyant on good news from Europe and the next they’re on the slide. The latest news is that negotiators have reached agreement on an outline for a deal to restore balanced budgets in Greece and Italy, but who knows what will happen tomorrow, next week or next month.
If Europe does slump into a prolonged recession, the consequences could be that it will be more difficult to get loans from Australian banks because international debt markets could get rigid again like they did at the beginning of the GFC. That means if you’re planning to borrow to invest, it could be more difficult to get through the application process in the year ahead.
Solution: consider using savings strategies, rather than borrowing strategies, to build your wealth.
Try not to be too dependent on borrowed funds as a wealth building strategy.
Job ads were down in the most recent figures due to the continuing lack of activity in the construction industry. New housing starts are still low as first homebuyers stay out of the market and there’s not a lot of commercial or industrial building going on (outside Australia’s mining precincts). If Australia’s economy slows, unemployment could rise.
The financial consequences of losing your job can be catastrophic. The worst thing you can do is say “It’ll never happen to me”. Always be prepared, just in case.
Solution: Have an emergency buffer to ensure you can cover day-to-day living costs for at least three months. Keep these funds somewhere accessible, such as a high interest online bank account.
Get rid of any expensive credit card balances. Review your home loan. Put a savings strategy in place if you don’t already have one. Always keep yourself on the market: have an up-to-date resume and referees. Don’t be afraid to refresh your skills.
One of the reasons the Reserve Bank lowers interest rates
is because it believes inflation is sitting “within the safe range”. However, the ongoing resources boom always poses the threat that inflation could take off and that can be particularly difficult to live with if you’re in the “low speed” non-mining part of the economy.
Inflation means the value of your money goes backwards. That means you need to make your money work as hard as possible to keep pace with inflation.
Solution: Don’t keep your money in low-interest bank accounts. Make sure you’re earning a reasonable rate on your savings – at least 5% is an acceptable rate at the moment and there are plenty of accounts and term deposits around offering more than 5%. Avoid paying unnecessary fees on your bank accounts, credit accounts, mortgage and super. Spend less wherever possible. Take advantage of current retail sales and always shop around.
4. Not enough cash
If Europe does go belly up and we’re all confronted with GFC round two (or three), a healthy cash buffer will be essential. Many investors were caught out in 2007 because they had to cash-in long term investments like shares and property and that meant they got hit with capital losses.
If they’d had enough cash to weather the storm, they could have waited until markets recovered.
Solution: everyone should have a healthy cash buffer to get through a short-term financial crisis. If you’re still working, you should aim to be able to live off your savings for at least three months in the event that other income sources dry up. Retirees need to consider having a cash buffer of around three-years’ living expenses. That way they won’t have to sell longer term growth assets until the market recovers.
5. Too much cash
Ongoing market volatility means many people are currently sitting on too much cash. It’s stuffed in mattresses (and low-interest savings accounts) all around the country. It’s OK to have big cash holdings when interest rates are high but they’re currently on the way down.
Solution: re-enter longer term markets (such as shares and property) gradually and with care. There are some real bargains around at the moment.
6. Super shock
ASIC says it will be focusing on the fact that many of Australia’s super funds don’t currently tell members exactly where their retirement savings are invested. There’s currently no legal obligation on super funds to tell you exactly what shares, managed funds or other investments it holds. That makes it very difficult to assess how much risk your savings are really exposed to or whether you’re currently getting good value for money.
Solution: get pro-active with managing your super. Ask more questions of your fund and demand answers. If you’re dissatisfied consider changing funds or starting your own self-managed super fund so you have total control and know where every dollar is invested.
-- By Jackie Pearson
It can be confusing to know whether to get a variable rate or fixed rate mortgage, and what features are important. That's why it's important to not only check the right rates, but make sure that you're getting the right features in your home loan. Get help choosing the right home loan