Three Steps Households And Businesses Can Take To Prepare For Recession And Recover From The Floods

The “R” word is being whispered more often, but while the direct impacts of a recession are largely out of a person’s control, the mindset and tools needed to weather the coming economic storm certainly aren’t. Recent floods and slips in Auckland and elsewhere, only exacerbates cost of living and post COVID issues for Kiwi businesses and families.

Shula Newland, who is Founder of Full Balance Financial Coaching and social enterprise AffordIT NZ which provides independent financial planning, budgeting, and coaching to families and businesses—said stories about negative GDP growth and job vacancy listings declining in New Zealand, are beginning to appear more frequently in media. Prominent economists report signs that the country has already dipped into a recession. This means less spending all round, loss of contracts and more redundancies as companies cut costs to keep their businesses profitable.

“Many business owners were enormously impacted by the COVID-19 shock and are still struggling to pay back all the debt they incurred over the last few years to get through Covid. If they have been hit by the floods, this is going to impact their cashflow and ability to service debt and survive even more. This includes IRD debt payments now the payments for the Small Business Cashflow loan are now due and any non-payments are starting to compound, as interest and penalties build up. Pretty much every Kiwi has been hit by rising costs. It’s getting tough out there and it’s going to get worse with the floods and food prices impact,” Newland said.

For those wanting to know what help they can access during these times, or have been affected by the floods, Newland keeps a Facebook page Financial Support NZ up to date with the help that is out there and to answer any questions.

“There is a lot of help, it is just knowing that it is there and what they can provide. “

Compounding the problem, banks are lifting interest rates as the cost of borrowing for them increases with the OCR rate. Newland said a lot of Kiwi homeowners expect their mortgages to increase this year and the new interest percentage is likely to cut deeply into people’s discretionary income and savings, if they have any.

“If you had a $600,000 mortgage fixed at 3 per cent over 30 years, that would cost about $600 per week to service. But if the interest rates rise to 7 per cent, the weekly payments would almost double to $940.

“Many families already have tight budgets, so it will be nearly impossible for some to make up this new amount without thinking outside the box,” Newland said. Being resourceful, and not letting it get you down, will be key.

She warned that having too much debt in a recession can be highly dangerous and if people have been or are living off debt to sustain living and lifestyle costs—unless people have other assets, they can sell to cover it—the coming downturn risks crashing the ‘house of cards’ when the income can’t sustain basic expenses and debt payments. It is really important that these people seek help as soon as possible, rather than putting their head in the sand!

In the coming recession, Newland explained that people still have many options, and it is important not to panic, but to have a plan in place.

“Those families that are feeling stressed about their finances can access free, confidential, and independent financial coaching via the Employee Assistance Programme (EAP) or book a time with a free local community financial mentor or budget advisor.

If you are in business and struggling, talk to your accountant in the first instance and look for referrals to a specialist if needed, including a financial coach that specialises in small businesses. Funding and referrals may be available via your local Regional Business Partner Network as well.

“If your situation is already precarious, don't put your head in the sand until something forces you to deal with it, like IRD debt. By then it might be too late,” Newland said.

Newland offers three key tips for people concerned about the looming storm clouds.

1. Cash is king.

While in good economic times, extra profit is often invested into expansion of the business, but prudent management also requires the building up of liquid funds as well.

The time to do this was before we moved into a recession, but anything you can do to build up cash now will mean that you have more of a buffer when things start heading south. This may mean prioritising cash savings, instead of paying down debt and keeping lines of credit open (e.g., over drafts and credit cards). Moving into a recession requires more flexibility. And the ultimate flexibility is cash, Newland said.

“Good financial planning means always having cash on hand and diversifying your income sources, because you never know what is around the corner. This means more cash if you own a business, a house or multiple properties, where your risk of loss of income and extra unplanned costs is high. You never know what could happen. It’s never too late to start saving.

“For those that can’t pay for their basic living costs and have no access to cash or investment funds, you can always access your KiwiSaver in hardship,” Newland said.

2. Have a plan

Before the worst of a recession arrives, it’s important to take stock of your financial situation.

Are you in a position that could be precarious if things change, even slightly, or if you lose your job? Do you know what the minimum you need to get by on, what is your back up plan if things get worse—can you find other sources of income, like renting out a room or take an extra income on the side?

Once you have a plan, it is important then to communicate the plan as required with parties involved. Make sure your partner and family, staff are on board, and any outstanding creditors know that there is a viable plan in place.

“With good planning and advice, you can minimise the negative issues of such bottlenecks. For example, communication with creditors will be important to avoid them taking action.”

3. Get good advice.

This isn’t the first time New Zealand has moved into a recession and it won’t be the last. There are many financial experts who have experienced multiple recessions and they often have plenty of knowledge about protecting wealth and getting through this.

Engage with experts sooner rather than later, Newland said. They can help you determine whether you can get through, or you need to bail out sooner rather than later.

There really are many options the average person and business can take when they need to tighten their belts. Often people complain about the cost of food and petrol while blowing money in other areas, or failing to realise that they could be accessing government support if their income has dropped.

This is true for many business owners whose income has reduced, but who may have applied (or been declined help) incorrectly in the past because WINZ incorrectly assessed business income.

“For businesses, the IRD is open to negotiations if the company is running into revenue trouble and debt gets too big. IRD doesn’t actively pursue debt straight away and it is easy to forget about the tax debt in the background, while it grows. Eventually IRD will catch up with you though.

“Make sure your payment plan with IRD is affordable, or you will just go around in circles and IRD will move in and liquidate. There are many companies including us, that specialise in tax debt negotiation.

“It may be two or three years before debt catches up with you but stay in contact with creditors and advisers to best navigate any issues early before it is too late,” Newland said.

© Scoop Media