Over the past few months COVID-19 has claimed hundreds of thousands of jobs just in Australia alone. There are expectations that we already have unemployment rates above 10%.
The unemployment rate is likely to have doubled to about 10 per cent by June. Preliminary figures from the Australian Bureau of Statistics show that employment fell by about 780,000 people over the three weeks to April 4. And so far, 3.3 million workers are covered by JobKeeper.The Age
This means that either you or someone close to you has probably lost their job entirely. Maybe they’ve only been stood down or had their hours reduced but the result is the same. Less money in which means more stress when it comes to trying to manage the budget and the future.
It’s not just individual people either, entire companies are of course also being heavily affected too. They’re suffering hard and going bankrupt left right and centre all because they don’t have appropriate levels of liquidity on hand to help them through a prolonged period of lower revenue.
This was pointed out quite hilariously and ironically by a number of Tweets throughout the month and they’re dead right too. Companies and individuals alike should have appropriate levels of liquidity available at all times for these types of Black Swan events.
No one knows when these types of things are going to happen or how impactful they’ll be to your specific life. But they do happen regularly throughout time and so unless you want to be living on the street and starving at some point in your life you need to prepare for them and take the matter seriously.
Global financial systems collapse. Category 5 Hurricanes hit. Basically the entirety of Australia simultaneously burns down and more. Major, extremely hard hitting crises can and will hit you so having an emergency fund is critical for long term flexibility and success. Even loosing your job for 1-2 months can be devastating if you’re the only bread winner in the family or have large, inflexible expenses.
Different Types Of Emergency Funds
These types of emergency funds take on different forms depending on who you talk to or read. Some suggest 1 month, 3 months, 6 months while others advocate for 12 months or even more.
When you have a mortgage though, it makes the most financial sense to merge this emergency fund with your mortgage as it gives you the best ROI this way. Having $10,000 in a savings account earning 1.5% interest (if that!) is kind of dumb when you could have it in your mortgage offsetting 3% of interest.
Having it with your mortgage also reduces complexity and can even mean not having to deal with two separate banks. While many banks call this setup having an Offset Account and charge you extra for it, most modern mortgages allow for free (or near free) redraws even on the most basic “economiser” style home loans.
In this way you can setup your mortgage with the lowest interest rate, lowest ongoing fees (read $0) and still have access to this incredibly handy feature. Even if you loose your job, you’re covered for a good few months until you hopefully get another one.
Personally I feel much more comfortable with at least 6 months in expenses available to me at all times. Obviously if you’re fresh out of uni or just starting out you might only have 1 month which is fine too. The older you get, the more likely loosing ones job is (not to mention it being harder to get a new one) and so the bigger buffer you’ll want to have.
Extreme Emergency Funds
You can go further though.
The next level after you’ve gotten a good 6+ months of expenses saved up in your mortgage is to totally get rid of your mortgage. Your mortgage repayment is likely your biggest regular expense by far and probably sucks up around 40%+ of your pay cheque.
Obviously once you’ve fully paid off your mortgage it’s still a good idea to have an emergency fund just as before, but it means that that fund will now go even further due to your reduced expenses.
Throughout the years I’ve been ruthless in cutting away all irrelevant expenses so that we operate as lean as possible. By operating day in and day out on these vastly lower expenses it makes us more flexible and more resilient in case either DW or I loose any income sources. It also means we save more and can pay of things like our mortgage quicker.
Check out our huge 5 part series guide on cutting your expenses
Read the Guide!
Getting rid of an expense is actually better than getting a raise for that same amount as you get taxed on a pay rise. Once your mortgage is gone though you can normally operate entirely on one income source for years. This enables you to have a huge amount of redundancy and operating headroom if things do ever go south COVID-19 style.
Ultimately this mortgage freedom can mean the difference between loosing your job, house and livelihood or loosing your job and not feeling too much of a hit from it at all. We’re now seeing those who never had emergency funds or paid off their mortgages early feel the full wrath of this Black Swan event. Meanwhile the ones that kept their discipline, practised Awesomeness Inflation and smashed their mortgages during the good times can stand the hit and move on again without too many bruises.
COVID-19 Is A Wake Up Call
When a Black Swan event hits it brings things front and centre to our attention. While everyone suffers from recency bias, this time having a huge honking pandemic shoved right in your face can be a good thing.
Don’t let this attention whore go to waste and use it to really motivate you to kill that mortgage. The amount of stress and hardship that occurs when you have a huge mortgage looming over your head when you’ve just been let go can be almost indescribable and tear families apart.
So be safe and don’t just wash your hands, but Mutilate That Mortgage now too!
The benefits include: 1) How to pay off your mortgage faster than 99% of people with one hour a month of work 2) How to get rid of your debt and have the freedom to spend money on the things you love, guilt free 3) Clear outline of how to setup your expenses, mortgage and general finance 4) How offset accounts work and how to get the same result without being gouged by the big banks 5) How to cut through the crap and focus on the things that truly matter when taking down a mortgage 6) How to adjust the strategy so it works for you, even if you have kids, even if you only have one income 7) How to do all of these things and maintain a normal social life (and never be cheap).