How to financially prepare yourself for possible unemployment

Here’s how to prepare yourself financially if you’re facing an extended period of time without pay, a pay cut, or even unemployment.

We may be flattening the infection curve, but job losses are still rising as many businesses struggle to survive in this new COVID-19 world.

With a recession looming, unemployment could rise to 15% according to the Grattan Institute - the highest unemployment figure since the Great Depression.

Anecdotally, I’ve heard many stories of people in my personal life who have had to take significant pay cuts or are facing the possibility of having to take leave without pay as their company tries to keep its head above water.

Check your spending

Regularly reviewing your spending habits is something you should always be doing, worldwide pandemic or not. But in these uncertain economic times, it’s even more important to get your spending under control - particularly if you’re facing the possibility of unemployment or have recently taken a pay cut.

If you’re now working from home, you’re probably spending less money on transportation to and from work but you might be spending more money online shopping or on takeaway food while you’re stuck in iso. Take a look at what you’re spending on and see if there are any areas where you can cut back.

It’s always a good idea to check your bank statements and see if you have any recurring payments coming out for services that you’ve forgotten to cancel.

Set up an emergency fund

If you haven’t already got an emergency fund, this is the time to make one.

Ideally, an emergency fund should have enough to cover between three to six months' worth of expenses because this is usually how long it takes most people to find a new job, according to Seek.

You should take a look at how much money you would need to cover your rent, bills, groceries and other essential expenses if you were to lose your job or take a big pay cut. What this will look like will be different for everyone. For some people, a few thousand dollars may be enough to happily survive on, but others may need a far bigger amount to feel comfortable with.

For those who already have an emergency fund, you may want to continue topping it up while you have income coming in so there’s plenty to cover you if your situation suddenly changes.

Maximise your savings

Interest rates on savings accounts are pretty low at the moment, thanks to all the recent rate cuts, but there are still some savings accounts on the market with decent rates if you look hard enough.

Need somewhere to store cash and earn interest? The table below features introductory savings accounts with some of the highest interest rates on the market.

Alternatively, fixed interest rates on some term deposits are actually going up in response to the coronavirus crisis and the economic shockwave that has followed.

This presents an opportunity for savers to lock away their money at a decent rate for a period of at least six months.

Want to earn a fixed interest rate on your cash? The table below features term deposits with some of the highest interest rates on the market for a six-month term.  

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Term Deposit - 6 months

Product Features

• Easy online application
• Interest can be paid to other institutions
• Maturity alert by email and phone

Minimum deposit$5,000

5.15%Interest rate p.a.

6Term

More details

Read: Banks which are offering special term deposit rates during coronavirus

Refinance your home loan

Haven’t given your home loan much thought since you initially took it out? It’s time to change that.

If your home loan interest rate doesn’t start with a 2 or a 3, get on the phone to your bank and ask for a better rate. If they’re not willing to budge, start comparing home loans to see what better deals are out there that you’re potentially missing out on.

To demonstrate how much money you could save by switching to a cheaper rate, let’s take a look at someone with a $400,000 home loan with a 30-year term making principal and interest (P&I) repayments.

After two years of being on a 4.00% p.a. interest rate, the interest rate was dropped to 3.50% p.a. and the minimum monthly repayment amount dropped accordingly.

This amounts to a saving of $108 per month which may not sound like much, but over the course of one year that amounts to an extra $1,296 which could be put towards your savings.

You could save even more over the life of the loan by keeping your repayments at $1,910 despite the lower interest rate. This could see you pay off the loan years earlier and save thousands in interest.

These days, many home loan interest rates are even lower than 3.50% p.a. thanks to the last five interest rate cuts from the Reserve Bank since June 2019. Some lenders are even offering fixed home loans in the low 2% p.a. range so it’s really worth shopping around for a competitive rate.

If you’re unhappy with your current home loan rate and want to refinance, check out some of the lowest rate variable home loans for owner-occupiers in the table below.

Buying a home or looking to refinance? The table below features home loans with some of the lowest variable interest rates on the market for owner occupiers. 

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Variable Home Loan (LVR < 90%)

Product Features

• Low rates for purchase and refinancing
• Simple online application process
• No fees, unlimited redraws, 0.10% offset

Monthly repayments:$2,408

6.04%Advertised Rate (p.a.)

6.06%Comparison Rate*

More details

It doesn’t always pay to be loyal - sticking with the same lender could cost you an extra $1,000 in higher interest payments per year.

Save on your essentials

As most of us are now spending more time at home (thanks, national lockdowns!) there’s almost no excuse not to look for better deals on your essential bills, like your home, car or health insurance, electricity bill, and phone or internet plans.

Because most of us are also working from home, our energy bills are expected to rise. Here are some tips on how to make your home more energy-efficient.

Take advantage of coronavirus financial support schemes

If things are really dire, there have been many stimulus support payments announced to assist people struggling financially as a result of the coronavirus. If the company you work for has experienced a drop in revenue of at least 30% you may be eligible to receive the JobKeeper payment.

You could also defer your mortgage repayments as many of the big and small banks are allowing customers to defer their loan repayments for up to six months during the crisis. Just keep in mind that deferring your mortgage repayments simply kicks the payments further down the road and will increase your repayments and the overall amount of your loan because interest is still accruing in the background.

If you’re a credit card user, you may also be eligible for some financial support. Some banks are allowing their customers to defer repayments for credit cards and personal loans, while Commonwealth Bank says it hasn’t ruled out lowering interest rates on credit cards.

Many health insurers are also delaying premium increases until later in the year as a result of the virus while some car insurers are offering policy discounts.

Savings.com.au’s two cents

The sucker punch of coronavirus has winded the jobs market and some companies are barely keeping their heads above water. That’s why it’s a good idea to start preparing yourself financially in case your employer asks you to take a pay cut or worse, has to let you go.

In these unusual economic times, it pays to be prepared.