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How to cope with the soaring cost of living

With the cost of living climbing, there’s no two ways about it: New Zealanders are feeling the squeeze. The question is, how are they responding? 

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04 May 2023

Soaring cost of living: here’s how Kiwis are coping

With the cost of living climbing, there’s no two ways about it: New Zealanders are feeling the squeeze. The question is, how are they responding? 

With this very question circling our heads, we recently conducted a survey of 1,000 New Zealanders aged 18 and over, to get a sense for Kiwis’ financial resilience in this environment. And as we’ll see, it’s been a timely reminder of the importance of big-picture thinking when times are tough. So, let’s start with some stats.

  

Kiwis’ top financial concerns right now 

With inflation biting and the Reserve Bank trying to rein it in with a long series of aggressive interest rate hikes, it’s probably no surprise that our respondents’ biggest financial concerns were: 

  • mortgage costs (20.2%); 
  • food expenses (19.9%); 
  • job security (16.8%), and 
  • petrol prices (13.9%). 

The Official Cash Rate (OCR) – the interest rate at which commercial banks borrow – quickly went from its historic low of 0.25% in August 2021 to over 5% recently(1), pushing up fixed-term mortgage rates from about 2% to nearly 7%, and floating rates well over 8%.  

OCR increases are designed to slow the economy. But until they manage to bring down inflation, New Zealand households have to deal with higher mortgage rates on top of a cost-of-living crisis increasing the cost of pretty much everything.  

The latest Consumer Price Index (CPI), published on 20 April 2023(2), shows that annual inflation has cooled down a little from its peak of 7.3% in June 2022. However, at 6.7%, it remains well above the RBNZ’s target inflation rate of 2-3%. And one of the reasons why inflation is so sticky is that the labour market is too tight, which has fueled a wage spiral in the past year.  

So, for things to turn, the unemployment rate will need to jump up; and if interest rate hikes and migration flows picking up will eventually make a difference, only time can tell when. 

 

So, how are Kiwis responding to the challenge? 

As our survey found, 42% of people surveyed reported feeling more stressed out due to the cost-of-living crisis. And many people are adapting their financial habits, for example by: 

  • cutting costs (45.4%); 
  • investing less (35.8%), and/or 
  • saving more (34.3%). 

While not related to our survey, another good example of changing behaviors comes from new data on KiwiSaver provider switches. Inland Revenue (3) recently revealed that the number of people switching KiwiSaver providers was unusually low in January and February 2023. Why is this happening? An educated guess is that, faced with recent losses, KiwiSaver members are reluctant to make a move, possibly waiting for the market to turn. However, while this is understandable, it would be an emotional response as opposed to an informed decision based on long-term goals. And this takes us straight to the next point.

  

Some practical steps to take 

Looking at the survey responses about changing behaviours, we find a mix of ‘potentially good’ and ‘potentially bad’ changes. For example, cutting costs and saving more can be good behaviours. On the other hand, though, investing less can free up cash right now but it’s also likely to impact longer-term life goals.  

To minimize the risk of turning short-term issues into longer-term problems, it’s crucial to be proactive rather than reactive, with a big-picture approach and a comprehensive plan in place.  

Here are some actionable tips to get you started: 

  1. Smart budgeting – Whip up a detailed budget that'll help you identify areas where you can ‘trim the fat’ without skimping on life's little pleasures. You could consider switching utility providers, opting for home-cooked meals over dining out, or exploring free entertainment options. You’ll find plenty of inspiration on budgeting in our article on Savvy money management in 2023

  2. Building an emergency fund – It was great to read that many people are putting an effort in saving more, despite the difficulties. When the cost of living is high, having an emergency fund at the ready is as important as ever. Aim to stash away at least three to six months’ worth of living expenses in a separate, easily accessible account. This can offer peace of mind and help you avoid taking on high-interest debt just to stay afloat.  

  3. Prioritising debt repayment – Repaying debt faster may not be easy when other expenses come up. But if you’re grappling with high-interest debt, knocking it down as quickly as possible can reduce the overall interest costs and free up more money for savings and other goals. Check out our article on Awesome money behaviours for different lifestages to learn more.

  4. Reviewing investments – While you may be tempted to take a step back from investing, including your KiwiSaver plan, it’s essential not to lose sight of your long-term financial aspirations. Regularly checking your investment portfolio will ensure that it aligns with your risk tolerance and objectives. Not quite sure where to start? Reach out to a financial adviser or use our digital advice tool to check how you’re tracking.
     
  5. Making the most of financial planning tools and resources - Knowledge is power, so why not use the wealth of information and tools at your disposal to help you manage your finances? Websites like Sorted.org.nz and our own Education Center can offer guidance and support in areas like investing, saving, budgeting, and more.   

 

The bottom line 

Facing the rising cost of living while juggling short-term needs and long-term goals can feel like an uphill battle. But with some strategic changes and the right approach, you can come out on top.  

How? By continuing to budget, save, invest and keeping your eyes on the prize. Remember: it’s a long journey, but if you stay committed to your goals and adapt as needed, you’ll be well on your way to weathering the storm.  

Sources: 

Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current developments or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance.