The Financial Services Council (FSC) has released its latest Financial Resilience Index showing financial confidence is falling and the cost of living crisis is challenging Kiwis’ overall financial resilience and wellbeing.

Since March 2020, the FSC has been annually tracking New Zealanders’ views on five key resilience factors including:

1. Financial confidence
2. Financial literacy
3. Financial preparedness
4. Job security
5. Wellbeing

Over the last three years this research has provided us with a good view as to how Kiwis are faring financially and how we can help our clients navigate through what has been a tough period of economic uncertainty due to the pandemic, rising interest rates, cost of living and severe weather events.

Overview of Findings

Key findings from the latest 2023 report show that:

• Kiwis are increasingly worrying about money, more often, with just under 50% of us worrying about money daily or weekly, that is 300,000 more of us than last year.
• Women and young people bear the burden of financial worries, with debt on the increase and savings on the decrease.
• Negative effects of financial issues on our wellbeing have increased across the board, and mental health is disproportionately affecting younger generations.
• We’re less prepared for a rainy day: Just 53% could access $5,000 within a week in time of emergency, down from 59% in 2022.
• There is a lack of confidence in selecting investments and planning for retirement and although the majority haven’t thought about how much they will need in retirement, those that have vary wildly in their assessments about what they may need to retire with dignity.

Although financial confidence and wellbeing has declined since the last report in 2022, job security and financial literacy indicators have improved slightly.  Worryingly, despite confidence in job security, we are less prepared for weathering financial shocks than in 2022.  39% of us (around 1.5 million Kiwis) are unable to access $5,000 within a week without going into debt if we have to pay for something unexpectedly.

Access to an emergency or rainy day fund helps build financial resilience and knowing that it’s there gives you peace of mind so you can focus on what matters most, rather than worrying about “what-ifs”. This reflects the impact on overall wellbeing where more than half (56.3%) of the respondents reporting financial issues were adversely affecting their mental health, up from 49.8% in 2022.

When it comes to retirement, while more of us were feeling “very prepared” for retirement, overall 62.2% of those surveyed felt “not prepared at all” or “not particularly prepared” for their retirement, up from 57.4% last year.

Cost of Living and the Misery Index

The cost of living crisis is weighing heavily on Kiwis’ minds, with just under 50% worrying about money daily or weekly. The concern about money is unsurprising given high inflation and the growing risk of a recession, but what is surprising is that household spending has remained stable. The Misery Index can help shed some light on this.

The Misery Index a measure of economic distress, calculated by adding inflation and the unemployment rate. A high misery index indicates stagflation or poor economic health. History has shown that if inflation is high, but the unemployment rate is low, consumers will continue to spend. People will spend, because they have reasonable job security. People are willing to continue to spend on household goods, cutting further into their budgets, because they have relative confidence that they can ride the wave of the recession with their job in tact. If unemployment starts to rise, spending will likely decrease.

Inflation Seeking Goldilocks…not too high or too low

How this affects investments

With inflation mentioned almost daily in the media, along with Central Bank targets for inflation, many people may well be wondering how and why these target ranges are set.

Obviously slowing the economy has a cost but subduing inflation also has rewards, particularly regarding investment returns. This is highlighted by US investment returns over the last 50 years received during differing levels of inflation, as shown in the table below. Too high levels of inflation are corrosive to household budgets and returns on investment.

The highlighted range in the table, shows inflation between 0%-4% per annum provides the best potential for investment returns. These returns in turn reflect prevailing wider levels of economic activity. It is for these reasons that Central Banks (including the Reserve Bank of New Zealand (RBNZ)) target inflation within a similar band.

Source: Bloomberg, Quarterly data since 1973

Although inflation decreased from 7.2% to 6.7% in March 2023, we may still experience these high rates for some time yet, so if you aren't sure if your investments will serve you in these conditions, talk to one of our financial advisers.

What are we doing to help?

It’s pleasing to see that financial literacy has increased in the last year. As people learn more about finance and investing, they can develop tools to cope with market changes and become more confident investing their money, which will then improve their financial preparedness and overall wellbeing.

We launched our Private Wealth Webinar Series to help grow people’s financial literacy on various financial educational topics. So far, we have covered Investing for Women, Investment Asset classes, the Role of a trustee for Charitable Trusts, Trusts for Modern Families. Having a better foundation of financial literacy will give investors more confidence to invest their money,

At Trustees Executors, we want to help improve Kiwis financial wellbeing, amidst these difficult and uncertain times. This includes providing advice, building a financial plan, and helping achieve financial goals. Our advisers are here to help. If you’d like to learn more about exactly how a financial adviser can help you, reach out to us today.

For more insights, download your copy of the Financial Resilience Index here.