MBA, BSc, DipFP
Financial Planner / Managing Partner
Cashflow Tips In A High Interest Rate & Increasing Costs Of Living Environment
(00:00): We’re all under cash flow pressure right now with the official Australian cash rate rising from 0.1% to 2.35%. This means our home loan interest rate is now 2.25% more than it was at the start of the year. From talking to our clients over the last few months, we’ve compiled three things that you should consider to better manage your financial situation in this environment.
(00:28): Hi, I’m Raffi Pailagian. I’m a financial planner with Manly Financial Services. I’m seeing many people at the moment feeling the pinch off the back of high interest rates due to high inflation, and it looks like there’s more of this to come.
Why Is The RBA Increasing Interest Rates?
(00:39): During my meetings, many clients are asking, “Why is the RBA increasing interest rates?” Well, the short answer is the record low interest rates around the world have fueled investment and spending or demand-driven inflation. In addition, we’re experiencing supply shocks due to the COVID lockdowns and war in Ukraine, or supply-driven inflation, and both these issues have caused domestic inflation rates to skyrocket, and the only way the Central Bank, or RBA, can reduce inflation is by slowing down the economy. Luckily, in this environment we’re also seeing job security, with low unemployment, skill shortages and wage rises.
(01:12): So what can we do to manage our finances as effectively as possible in this current environment? The first thing to do is look at areas where you can get ahead. You can consult your financial planner or do this work yourself to look for gaps in your financial situation that directly tie to your cash flow.
Step 1 – Look At Your Budget
(01:27): Firstly, look at your budget. Look at your spending by looking at transaction statements from the bank or credit cards, and try to separate your discretionary spending, the things that you would like, from your non-discretionary spending, so the things that you need. Try to reduce your discretionary spending if there’s an opportunity. Look at your tax returns to see if you’re claiming all the tax benefits that you possibly can. Look over your loan and credit card products to see if there’s a way you can switch to a better deal. Why pay for a platinum credit card when gold or silver will do?
Step 2 – Don’t Focus On Short Term Market Movements
(01:55): The second step is from an investment perspective. Don’t be swayed by short-term movements in markets. Earlier this year when the war began, we saw some huge market volatility. Investors started selling growth assets, as they were worried about a downturn. Since midyear the markets have rallied and investors are again seeking opportunities in growth assets without considering risk and volatility the way they were earlier in the year.
(02:15): There’s a great saying that says, “The secret to investing is time in the market, not timing the market.” That basically means that you can create more value and reduce more risk by investing over the medium to long term according to your risk tolerance and not according to the short-term fluctuations in the market.
Step 3 – Be Careful What You Cut
(02:30): The third step is probably the most important. Be careful what you cut. At times of cash flow pressure, the first thing we do is try to cut costs, and it would be easy to cut costs in areas where we don’t think there’s much value or need. Surprisingly, insurances such as income protection fall in this area, as people think, “Well, there’s no way I’m going to claim,” but it’s only when you suffer a loss of income due to accident or illness, when true cash flow pressures are experienced. Be careful what costs you cut out of your budget, and if you don’t have income protection, consider this as a priority, as this can really save you financially if you were to suffer an accident or illness and not be able to work for a period of time. Income protection can be funded through super to save you on cash flow, or it can be funded individually, which may entitle you to a tax deduction.
(03:11): I hope you found these three tips to manage your financial situation informative in this difficult environment. By no means is this an exhaustive list, and the solutions to the problems really depend on your goals and objectives. Our advisors at Manly Financial Services would love to meet you to assess your current situation, your goals and objectives, and to recommend solutions that can help you meet them.
Please feel free to give us a call on (02) 9976 3388, or contact us via the below link.