Lockdown's once in a lifetime money lesson

Thursday, 11 June 2020

Lockdown resulted in households spending a lot less, and the result for those able to maintain their incomes was a one-off chance to reduce debt, and lift savings.

OPINION: We've entered the fourth month of our new money lives, and we've learned some important lessons.

Not least has been the clear demonstration of what happens when households cut spending to the bone.

The shocking financial uncertainty, and hardship of the Covid-19 economic shock, has been documented by Stuff which has charted the massive rise in demand for food banks, the 122,000 repayment 'holidays' and reductions on mortgages and other bank loans, and the 17,000 businesses that have done deals to restructure their loans with banks.

Around 1.7 million people's wages have so far been paid with help from the Government's wage subsidy scheme. Unemployment is rising, expected to pass 9 per cent later this year.

* Your pandemic 'money bubble' is there to help in a financial crisis

* Loan repayment 'holidays' top 100,000, but home loan 'discounts' disappear

After an intense three years, Tracy Hemingway paid back a mountain of consumer debt from a liquidated business and a lifestyle she couldn't afford.

But focusing entirely on the harrowing impact on the individuals and families behind these statistics misses something – the many households who used lockdown to reduce debt and boost savings.

In the middle of what the World Bank is calling the fourth biggest economic shock in 150 years, there are many households which have not been brought to their financial knees.

We should not overlook their experiences, and the lessons from them.

I recently talked with the erudite Malcolm McKinnon, author of The Broken Decade, a history of New Zealand's experience and recovery from the Great Depression that started in 1929.

He spoke to me about the importance of not allowing a 'sugarbag' view of the world to obscure that life went on in a relatively normal fashion for many people, even as the unemployment queues lengthened in after the 1929 depression began.

The term sugarbag was a reference to the minority of people who made shorts out of sugarbags during The Great Depression because they couldn't afford to buy new shorts.

While that made for a good headline, it did not reflect the majority experience of the depression years. Tough, yes. Uncertain, yes. Totally awful, no.

For my household lockdown was unnerving, and income-reducing. We took a lot of nice walks in nearby parks, made a lot of jam from windfall fruits, and worked from home because we both could.

I took a voluntary pay cut, and until Stuff's ownership changed, my job looked very threatened indeed.

My wife's job remained secure. Compared to most households, we were financially stable. We're not renters, have no debt, and have emergency savings – the result of two decades of trying to practice what I preach and being old enough not to have bought my first house during a period of ludicrous house prices.

As a result, not being able to spend throughout lockdown – which started for us on March 15 when we fell sick with a Covid-19-like illness but did not qualify for highly-rationed testing – we ended up increasing our cash savings.

Do you have a positive lockdown story to share? Contact rob.stock@stuff.co.nz.

Yes, we feel fortunate, but bank statistics show we were not alone.

In April bank deposits jumped by a startling $5.5 billion, and debt owed to banks dropped by over $2b.

During April people wiped $1b off the amount they owed on credit cards.

Households which could reduce debts, or make extra savings, did it during a period when their petrol bills had dropped to near zero, and recreational shopping was temporarily almost impossible.

The long-term wealth effect of the Covid-19 recession on households is not yet known, though we know that temporarily at least, the economic crisis has further widened the inequalities between the haves and have-nots all around the world, according to the World Bank.

But deposit-growth and debt-reduction have demonstrated, albeit under depressing and extraordinary circumstances, how fast things can change in households with surplus income who use it to pay down debt and increase savings.

GOLDEN RULES:

* Reduce debt when you can, as fast as you can

* Save when you can, as much as you can

* Stay as positive as you can