Five ways to protect your finances from a COVID-19 hangover

The economic impact of COVID-19 is expected to last for two years, according to research from accounting firm KPMG. But there are ways that everyday Aussies can protect their finances for the foreseeable future.

Two-year COVID-19 hangover

Research obtained by The Australian from KPMG indicates that it may take until at least September next year for the Australian economy to recover – 18 months after the coronavirus began to adversely affect the country.

This research also shows “economic activity in the accommodation and food services sector will be half what it was by June 2020 before charting a long and painful return to pre-COVID levels of output by March 2022, almost two years later”, according to The Australian.

This two-year slow return is similarly predicted for the retail sector, with arts and recreation expected to suffer a “40 per cent hit to output”, staying at low levels until December 2022, as noted in the KPMG research.

Is now the time to withdraw superannuation?

Meanwhile, Australians that are doing it tough have been turning to their superannuation as a means to get through the COVID-19 economic strain.

The Australian Prudential Regulation Authority’s (APRA’s) latest data on the temporary early release of superannuation scheme showed that, as of 3 May, superannuation funds had issued early release payments to 830,000 members worth a total of $6.3 billion.

Aussies who withdrew their super took a payment of $7,629, on average. The average processing time was 3.1 days after receiving the application from the Australian Tax Office.

However, some experts aren’t convinced that this is the wisest move to make.

ISA Chief Executive Officer Bernie Dean said of the superannuation scheme: “It is tempting to tap into your super early, some may want to do so as a savings buffer, but nothing in life is for free and cracking open your nest egg comes at steep cost – it should be treated as a last resort.”

Further, Chant West data found that median growth superannuation funds declined by about 10 per cent in the three months to March 2020. With further economic decline expected, some Aussies may be wondering if withdrawing from their already impacted super is really the best option available.

Ways to protect your finances from Covid-19

There are other ways everyday Aussies can try to protect their finances now, so that they may potentially be in a safer position over the next two years.

• 1. Refinance to a lower rate home loan

COVID-19’s impact on the economy has been significant, but for homeowners there is a silver lining. Interest rates are the lowest they’ve been in history, thanks to five Reserve Bank of Australia (RBA) cash rate cuts since June last year. This means there are historically low interest rates up for grabs for those in a position to refinance to a lower rate lender.

For example, if you had a $350,000 30-year mortgage with the average variable, owner-occupier, principal and interest mortgage rate for April of 3.46 per cent, your monthly repayments would be $1,564.

However, if you switched to one of the lowest rate loans on the market of 2.09%, your repayments would be $1,309. This is a potential saving of $255 a month, or $3,060 a year.

Lowest fixed home loan rates for owner-occupiers

Source: RateCity.com.au. Data accurate as of 13.05.2020.

Lowest variable home loan rates for owner-occupiers

Source: RateCity.com.au. Data accurate as of 13.05.2020.

• 2. Pay off your debt(s)

Whether you’ve lost your income or fallen ill, it’s a challenging enough time without having to worry about how you’ll pay off your debts.

RateCity’s Debt Guide can help you get out of debt and put yourself in a better financial position for the future.

If you have multiple sources of debt, trying to manage them may have become increasingly difficult. One option you may consider is a debt consolidation loan. This allows you to roll your existing debts into one loan, so you can simplify how much interest you’re paying, as well as cut down on fees and other costs.

If you have credit card debt, personal loans generally have lower interest rates than credit cards. This may help prevent your debt from getting out of control.

• 3.Switch to a lower rate credit card

If you have a credit card with a high interest rate, and you’re often unable to pay your credit card balance off each payment cycle, you may want to consider switching to a lower rate option.

Whether it’s with your current credit card provider or with a new provider, comparison tables can help you compare new low-rate options you might switch to. Just be sure to check out what fees and other costs may be associated with a card swap.

• 4.Switch up your savings accounts

As the RBA has cut the cash rate to historic lows, interest rates on savings accounts have followed suit. You may feel as if your savings account is nothing more than a safe place to store your money. However, there are still savings accounts offering interest rates above inflation (2.2% according to the RBA), if you’re willing to switch.

Some savings accounts provide high interest rates as a bonus offer for an introductory period. Once that period ends, your interest rate reverts to their standard rate, which is typically much lower.

These introductory rates may be able to survive RBA cash rate cuts. The big four banks have promised that the bonus rate you earn will be locked in for the entire introductory period. Not all banks do this, so keep this in mind when you’re doing your research.

If you’re willing to put in the time and effort, you could hop between high-interest savings account. This would involve switching to savings accounts with high-interest introductory offers and switching again whenever the offer ends. While this process may involve some paperwork and effort, it could see your savings account better off over the next two years.

• 5.Lock in a high TD rate

One way to ensure your savings have a locked-in interest rate is to consider a term deposit account.

Term deposits allow you to put your money in a secured deposit for an agreed period of time. It will earn a set interest rate for that time frame too, so if the RBA were to cut cash rates further, your interest rate wouldn’t change.

Highest 3-year term deposit rates

Source: RateCity.com.au. Data accurate as of 13.05.2020.

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