Canny View: The rising cost of living means hard year ahead

It is easy to get into a cycle of borrowing from Peter to pay Paul. Photo / Supplied

The Government has at last acknowledged the cost of living crisis, although to some it may be cold comfort at this stage.

A report by the New Zealand Initiative states households are spending an extra $3000 or more a year on essentials, with a third of the increase being due to higher transport costs.

According to Stats NZ, the annual cost of living increase was the highest recorded since the series began in 2008 for seven out of the 13 household groups. Yikes.

With articles cropping up like an Otago woman ordering groceries from Australia for 35 per cent less than at her local supermarket, it's no wonder the cost of living is such a hot topic.

To be frank – it's going to be a very hard year for lower-income households, especially single-earner households, or beneficiaries. And that's without mentioning the elephant in the room in the form of a highly indebted household sector facing some hefty interest rate rises, which is already under way.

Recent research from Finder indicates that more than one million Kiwi parents are operating the bank of mum and dad – and it's not just for big ticket items either. The expenses range from financial security while studying, to parents chipping in for grocery bills.

The portion who could rely on family support towards their first home seems to be dwindling too, and almost half of the shrinking pool of first home buyers identified as living with family to help save a deposit. Nearly a third of parents surveyed currently allow their adult children to live at home rent free, with an additional 22 per cent charging discounted rent.

With the growing costs of … well, everything, getting a gift or loan from family to help out is even more appealing if you (and they) can swing it.

If you're saving for a house and using either a gift, loan or the money saved from free rent to contribute to your deposit, having a firm grasp on your situation can be helpful to get you to your goal faster. And if you're in the position of being the bank of mum and dad, you may want to carefully assess whether you are in a secure enough financial position before helping others at the risk of your own nest egg.

There's also been alarming reports of people needing to rely more and more on buy now pay later schemes (BNPL) to purchase essentials as well. Under the current framework, BNPL schemes aren't subject to the same kind of scrutiny or regulation as traditional lenders or financial institutions.

This makes the growing use of and reliance on them just a bit concerning, as they are exempt from the usual rules meant to prevent predatory lending.

Consumer NZ says vulnerable people are at risk of falling into a "spiral of debt" while BNPL avoids regulation. Even the notorious CCCFA doesn't address these kinds of schemes, which has prompted Consumer NZ to write to Consumer Affairs Minister David Clark and request further consideration.

Admittedly, it's not often you see reports of people wanting more regulation from the CCCFA.

Some BNPL services are already available almost everywhere – for example, relative newcomer Bundll is available anywhere Mastercard is accepted.

You can see how easy it is for people to get into a cycle of borrowing from Peter to pay Paul, when borrowing interest free is an option at almost every turn. Gas, groceries … over the ditch there's even certain services offering to help pay your rent.

The snag in these schemes is that, while they don't charge interest, they're designed and marketed to make taking on debt more appealing by breaking it into chunks – and if you don't pay back those chunks on time, you'll get stung with a series of fees that can quickly add up.

Nick Stewart.

At the end of the day, you're still spending money you don't currently have. Sometimes it's a necessary evil … but it should always be treated with healthy caution, rather than the jaunty ease of mind advertised by many BNPL providers.

Before you tap in to BNPL, make sure you have a good grasp of your current situation. Does your budget have any fat to trim, like a Netflix or other entertainment subscription, which could be better utilised if needed? Regularly revisiting your expenditures and assessing your costs for cheaper deals can save you a few dollars in the long run – or at least keep you from borrowing them.

While the current climate may seem dire now, things tend to change over time if you can wait them out. As the adage goes – this too shall pass.

Many New Zealanders are facing a higher living cost regardless of their choices. Following the increase in inflation the next big questions for New Zealanders will be: "What will next quarter inflation reading be? Is the rise in inflation temporary or long-lived? How will it compare to market expectation? How will my children ever afford a home?" Or, "How will it affect my portfolio and my lifestyle?"

If these kind of questions are keeping you up at night, it's a good time to think about seeking out trusted professionals to help. A financial adviser can help you make sense of your situation for peace of mind.

· Nick Stewart is a Financial Adviser and CEO at Stewart Group, a Hawke's Bay-based CEFEX certified financial planning and advisory firm. Stewart Group provides personal fiduciary services, Wealth Management, Risk Insurance & KiwiSaver solutions.

· The information provided, or any opinions expressed in this article, are of a general nature only and should not be construed or relied on as a recommendation to invest in a financial product or class of financial products. You should seek financial advice specific to your circumstances from an Authorised Financial Adviser before making any financial decisions. A disclosure statement can be obtained free of charge by calling 0800 878 961 or visit our website, www.stewartgroup.co.nz.