Concern for households over 'misplaced financial confidence' - report


Financial confidence has risen over the past two years, but it could be that households are fooling themselves about how well off they really are, according to a new study.

The Financial Services Council's (FSC) latest report into resilience showed 86 percent of respondents were reasonably to extremely confident about their finances, up 8 percentage points from before the pandemic in 2020.

FSC chief executive Richard Klipin said other parts of the report suggested the high level of confidence may be misplaced, given the economic volatility, rising living costs and increasing interest rates.

"What the research tells us is there are some clear warning signs that there is a perfect storm brewing due to financial overconfidence, insufficient rainy day funds or retirement investments and economic uncertainties such as rising interest rates and inflation."

About 40 percent did not know if they could raise $5000 in a week in an emergency, and 45 percent said they would rely on friends or family or did not know how they would manage if they were suddenly unemployed or unable to work for more than three months.

Half of respondents said they had experienced financial issues that affected their overall wellbeing, and financial literacy had dropped with 44 percent saying they were financially literate, a decline of 6 percent.

"This drives a concern that respondents' views indicate potentially misplaced financial confidence."

Klipin said the over-reliance on friends and whānau and uncertainty on managing finances in times of crisis was worrying, because in tough times everyone would be affected, which could be a recipe for hardship.

"Factoring in how the economic environment has significantly changed since January this year, it is likely that the present picture is even more concerning."

Higher household bills

The FSC survey coincided with a report from ASB Bank suggesting households will continue to face higher living costs, but higher wages should keep them roughly in touch.

Senior economist Mark Smith said weekly outgoings were expected to rise by about $110 a week over the next 12 months, with about two-thirds going in non-tradable goods/ services and debt servicing.

He said the price rises would clearly hit some harder than others.

"Households without much debt will be faring better, whereas highly indebted households and those without a decent income buffer will find the going much tougher."

However, he said one surprise was the extent and speed with which incomes had risen, at around $100 a week in the year ended June, which meant many households were keeping pace with inflation.

"We expect household incomes to post more sizeable increases in the next couple of years, largely reflecting sizeable increases in wages and salaries and the expected rebound in other incomes," Smith said.

"This should mean households in general should have sufficient funds to pay the bills and potentially increase consumer spending."

Smith said he still expected overall spending to remain weighed on by rising interest rates as the Reserve Bank pressed on with lifting the official cash rate to combat inflation. ASB is forecasting a peak of 4.25 percent early 2023.