With the start of a new year, many of us reflect on past experiences and look forward to what the future holds. In the last couple of years, we all experienced something new: lockdown. While we might like to move on and forget about those frustrating and even frightening times, by looking back we can learn a few things that will help everyone in future.
So, we created our top 3 money lessons learned from lockdown to help us all prepare for whatever comes next.
1. Don’t switch KiwiSaver funds just because your balance drops
Financial anxiety and media coverage of Covid’s impact on KiwiSaver balances caused a lot of people to switch their KiwiSaver funds during lockdown. The Financial Market Authority (FMA) did some research into why people were switching at one of the worst possible times. Here’s what they found.In March 2020, there were seven times more KiwiSaver account switches than the monthly average for the previous year. Over 70 per cent of switches were to lower-risk funds. The 26 to 35 age bracket made up 30 per cent of those switches. Additionally, millennials made 21 times more switches to lower risk funds than in the same period of the previous year.
So a lot of people - in particular, younger people - switched their KiwiSaver fund in March 2020. Why is this a big deal?
Because it meant a lot of people lost money. And many of them could still be losing money.
The FMA report cites the potential impact on an individual’s savings: say a 28-year-old earns $65,000 a year, has a KiwiSaver balance of $22,000 in a growth fund, and contributes the minimum three per cent of wages. If they switched to a conservative fund in March 2020 and stayed there until retirement, they could miss out on $110,000 if they had stayed in the growth fund.
By August 2020, only 9% of those who left growth funds had switched back into one - meaning 90% locked in their losses and are still sitting in a lower risk fund which might not allow them to reach their savings goals.
Seeing your balance drop is scary, but markets are volatile. In the short–term, switching to a lower risk fund in response to a balance drop may feel like you’re cutting your losses. But investing is a long-term deal. You wouldn’t buy a house and sell it when the property value dropped, would you? Same deal.
We’re certainly not claiming that more conservative funds are bad for all. Everyone’s financial situation is different, as well as their risk tolerance, ethics and timeframes. But we recommend finding the right KiwiSaver fund for your situation to make sure you are not missing out on more money. Take our fund finder quiz and you can switch to a better fund in just a few minutes.
2. Why investing is the new saving
The easiest way to make the biggest long-term impact on your financial health is by investing. Sorting your investments gives you financial peace of mind for the future. You don’t have to worry about it on a day-to-day basis. Instead, you can sit back and be confident you have a growing nest egg.
Investments definitely took a hit from Covid. The S&P 500 fell 30% in 22 days, it’s fastest ever decline. But just one year later, it was back to almost a 100% gain off the Covid lows. Doing nothing and riding it out paid off.
Investing is all about the long haul. As Warren Buffett put it, “If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.”
There is no better time than now to get started investing. The simplest start is to sort your KiwiSaver fund. Choose a fund and it is invested on your behalf by the provider. Set your contribution rate and you’ll see that balance begin to rise. Then all you have to do is check in when you have a change in circumstances to make sure you’re still in an appropriate fund. And no one makes that easier than BetterSaver - you can take our Fund Finder quiz any time.
3. Emergency funds should be everyone’s #1 goal
An emergency fund is money set aside for the unexpected. If your car needs repairs or you suddenly find yourself in hospital, you have a financial cushion.
If lockdown taught us anything, it’s that the world can be turned upside down in an instant. People were immediately out of work and no one knew how long it would last or what was going to happen. We were all affected. Having an emergency fund would certainly have contributed to people’s peace of mind in the crazy uncertain times we faced.
But only 37% of us have enough savings to survive one month without a job. Almost 60% of us have savings of less than $500.
How much should you have saved up? Most experts agree that ideally we should have enough saved to cover 3-6 months of expenses. This sounds overwhelming, we know, but we’re going to make it simple.
Start with a goal of $1000. If you set aside $20 a week, you’ll meet your goal in 1 year. That’s not so bad, right?
Then once you’ve met your $1000 goal, continue to contribute and before you know it you will have built up the recommended 3-6 months of expenses. If you’re clueless about what 3-6 months looks like, log into your banking and find how much you spent last year and divide by 12 to see what one month of living cost you.
Don’t rely on costly credit cards or loans that take years to pay back. Commit to saving up an emergency fund to cover short-term needs while your investments take care of the long-term.
Our best tip: get financial advice
A financial adviser can give you specific advice on how to manage your money. Whether you have a little money or a lot, getting financial advice is for everyone.
The BetterSaver team focuses on making it simple for Kiwis to sort their KiwiSaver. With over 3 million members it can have a significant impact not only on individuals and families but the economic health of our country.
We firmly believe everyone should have equal access to financial advice. That’s why we are committed to educating Kiwis not just on KiwiSaver but on all money matters. Check our blog and follow our socials to find tips on everything from how to buy a first home to our top saving hacks and investing ethically.
Make this your year to become a better saver.