With interest rates exceeding 9% many households are struggling to meet their monthly loan repayments. Each week 50 Victorian families lose their homes through bank foreclosure.
At the other end of the spectrum, retirees and those approaching retirement are watching the value of their assets fall and their expectations of thier retirement lifestyle diminish.
Investors who have aggressively used debt to purchase shares using a margin loan are having to come up with extra cash or sell shares at reduced prices in order to avoid even greater losses.
Mortgage stress, Falling Super and Margin Calls have been triggered by the credit squeeze as a result of the subprime lending crises in the United States.
Here are my top ten tips of what to do if you are in one of these situations:
1. Have a plan - regardless of what position you are in you need to have a plan. If you don’t have a plan the danger is that you will be swept up with the emotion of the current climate and make decisions you regret.
Mortgage Stress
2. Sell the second car or downsize the car - particularly if you have a loan associated with the vehicle.
3. Sell some stuff around the home
4. Work a second job / work from home / work overtime
5. Get creative – think of ideas like clearing out that junk room and getting a uni student in to rent it out
Falling Super - retiree/pre retiree
6. Avoid the noise – the media sell a lot of newspapers by stimulating our emotions of fear and greed. It’s the fear emotion that is predominant at the moment. During the period when many property shows were on TV it was the greed emotion. Predictions about interest rate movements, when the share market is going to turn the corner and whether or not there is going to be a recession are rarely correct and you only find out which predictions are correct after the event. Don’t waste your time and emotion on the “noise” in the market place.
7. Work a little longer than planned or work part time to minimise the amount you draw from retirement assets. Research suggests that drawing on retirement assets in a falling market will have a long term impact on your financial position.
8. Salary sacrifice employment income into super – this is a great way to make the most of volatile markets. Investors are able to buy more units when prices are cheap and fewer when prices are more expensive (called dollar cost averaging). Make sure it is a diversified portfolio – as diversification is the only “free lunch” when it comes to investing.
Margin Call
9. Avoid selling at depressed prices – if at all possible try to avoid selling shareholdings at depressed prices. Provide additional assets or cash to decrease your lending ratio.
10. Focus on reducing your borrowing – be intense about reducing your level of debt and selectively sell assets at reasonable prices.
If you are in a particularly difficult situation, seek help and use it as an opportunity to grow and develop character. When the Biblical character Job, lost a substantial amount of wealth he didn’t lose his integrity. He responded by saying, “Naked I came from my mother’s womb and naked I will depart. The Lord gave and the Lord has taken away, may the name of the Lord be praised.”
Job was later blessed with twice the wealth he had previously.
If you are well resourced consider helping someone you know who is going through difficult times. You might like to provide a meal or perhaps meet some other need you are aware of.
Gavin Martin
Cornerstone Wealth
This newsletter does not take into account the personal objectives, financial situation or needs of any person. You should consider the appropriateness of the information having regard to your own objectives, financial situation and needs and obtain professional financial advice prior to making any decision.