Getting ahead financially is not always a straight-line process and for every few steps forward there is usually a step backward. Sometimes a step back is planned, as with retirement, the birth of a child, or time out to study, and sometimes not, as is the case with loss of income from COVID lockdowns, sudden illness, redundancy or relationship breakdown.

When your income falls, there are two important things to do. The first is to take a close look at your current outgoings and clearly distinguish between wants and needs. Categorise your outgoings under three headings; your financial commitments, such as rent, mortgage and insurance over which you have little control, your essential spending such as food, petrol, power and phone, over which you have some control, and your discretionary spending, such as entertainment and gifts, over which you have a high level of control.

The second task is to prepare a budget based on your new level of income. To adjust your expenses, start by cutting back on discretionary items as they are the easiest to control. Next take a look at essential spending. Food is usually your biggest expense item after your rent or mortgage and because you have a reasonable degree of control over how much you spend, with a bit of discipline you can make considerable savings. Finally, take a look at your financial commitments. It is difficult to get savings in this area without making a substantial change to your lifestyle, such as moving to cheaper accommodation. If you have tightened up your expenses and still can’t make ends meet, try asking these questions:

• Have you taken into consideration any additional income that might come from lower income tax rates, family tax credits or government benefits?
• Are there ways in which you can easily increase your income, for example by taking on a part time job or taking in a boarder or flatmate?
• Can you lower your contributions into KiwiSaver without missing out on any employer contributions or tax credits?
• Can you lower your short term debt repayments by refinancing at a lower interest rate?
• Do you have the appropriate amount of insurance cover for your new situation and are there any savings you can make in this area? These options are best discussed with your insurance broker.

Finally, there are the ‘last resort’ questions:

• Should you take a contribution holiday from KiwiSaver?
• Can you lower your mortgage payments by making your mortgage interest only for a short period of time, by increasing the period of the mortgage, or by taking a mortgage repayment holiday? These options are best discussed with your bank.
• Can you consolidate short term debts into a loan with a longer repayment period to reduce your monthly payments? Discuss this option with your lenders.

If the answers to these questions don’t solve the problem, you are probably in need of assistance from a budget adviser or other professional expert. You can find a directory of these services by clicking here.

Planned change offers the advantage of time to adapt to the change, and it is important to use that time wisely. The best way to prepare for a planned change, such as retirement or the birth of a child, is to start living on what your new income will be well in advance of it actually changing. There are three advantages to this approach. Firstly, it allows you to test whether your planned change is achievable before you actually commit to it. Secondly, it allows you to transition gradually to your lower level of income rather than moving suddenly from one income level to another. Thirdly, it allows you to save more before your income changes so you have more of a financial buffer should anything unexpected occur.