COVID-19 and money: The top five mistakes to avoid

NZ $100 note with mask.
Financial experts share common mistakes made in a downturn. Photo credit: Getty.

Financial experts say one of the golden rules of money management is not to make financial decisions out of panic.   

COVID-19 has created widespread uncertainty in the areas of job security, income, share prices and investment returns, causing panicked borrowers and investors to make bad choices.

Newshub asked a group of financial experts to share the top five money mistakes they've witnessed during the pandemic and how to avoid them. 

1. Making fear-based decisions

Enable Me managing director Hannah McQueen said that fear-based decisions lead to rash choices that don't provide the best outcome.  

Current examples are taking a mortgage holiday when it's not needed or doing a quick swap to a conservative KiwiSaver fund. 

"The [holiday] results in not only ending up paying more to the bank, but also using up your ‘get out of jail free’ card so it may not be there when you actually need it," McQueen said. 

"Quickly changing your KiwiSaver settings to conservative because the value is dropping [means] you take ‘paper’ losses to actual losses," McQueen added.

She suggests people approach their finances with a sense of calm, treat 'possible' and 'probable' outcomes separately and develop a plan.

"Calmly assess your situation: what money is coming in, what money is going out, what can be cut back, how long your resources will last and what you can do to improve it - and get advice," McQueen said.  

2. Spending up to total income

With many Kiwis on reduced incomes, now is a good time to look at spending - and feel good about any extra savings.

Accountant and money mentalist Lynda Moore said that people are generally spending less in lockdown. This creates an opportunity to look at channelling those savings into a goal.

"For [almost] four weeks, none of us have been able to spend money on going out for coffee or dinner: transport and parking costs...all of those small incidentals aren't there," Moore said.

"Develop a 90-day savings goal, break the cost down into a weekly amount, open a bank account and give it a nickname that relates to your goal," Moore suggested.

By reviewing spending in the four weeks before lockdown and comparing that to spending while in a bubble, people may be surprised at what they can save.

"Focus on the discretionary part: extra food, entertainment and clothing and total up how much you spent.  

"You might be shocked at just how much that is and where the money has gone," Moore said.

3. Not getting personal advice

Financial educator Lisa Dudson suggests that if people are on a reduced income, it's smart to revisit finances and cut costs - but think it through first and don't automatically follow the advice of family and friends.

"Sharemarket prices seem attractive [but] we could still be in for some very volatile times ahead: [ask whether] that fits your risk profile and goals," Dudson said.

Examples of reactive decisions are cancelling insurance policies and switching KiwiSaver funds without getting advice.  

"Cancelling your insurance may mean you won't be able to get the same cover again, so talk to your advisor first. 

"There [can be] a cost to getting professional advice but usually the cost of not getting it is much higher," Dudson added.

4. Overextending on a mortgage

Taking on a mortgage that's too large to handle - even if the bank has approved it - is a risky decision at any time, but particularly in a downturn.

Ed McKnight, economist at Opes Partners said that although mortgage applications typically undergo a 'stress test’, assuming a mortgage is affordable just because the bank says so is a mistake.   

Losing a job or income source is tough no matter what the size of the mortgage, but borrowing to the maximum amount creates pressure to get another job paying at least the same amount.

"This situation is most applicable for people in specialised jobs, where there aren’t necessarily a lot of companies that will hire that job type," McKnight said.

He suggests looking at houses below a certain price point and negotiating well with sellers. 

"It's wiser to take on a lower mortgage, but keep up the level of repayments you’d make if it was a bigger mortgage [to] pay down debt faster," McKnight said.

"Repayments can then be reduced [during] financial difficulties." 

5. Panic-selling assets

Often, when the value of property or shares falls, people quickly sell out of them to avoid further falls - another panic-induced mistake.

"Put simply, if you have $100 in shares and you sell them now for $50, you'll have lost $50 from the peak," McKnight said.

"But, if you hold on to those same shares and in three years they’re worth $150, you didn't  lose anything and instead achieved capital gain."

History shows that following every downturn is recovery. Unless extra cash is needed to live, assets shouldn't be sold because the environment is uncertain.

"Unless your investments are fundamentally flawed, it’s generally better to hold on to them," McKnight added.