The rising cost of living is certainly a pressure that is affecting the majority of households across Australia right now. With a solid financial plan in place and an effective money management strategy, even in uncertain economic times you can still make good progress towards your financial goals.
Although we have some relief with the cash rate being on hold this month, core living expenses such as groceries and utilities continue to be much more expensive than they were a year ago. If your income hasn’t increased to keep up, your cashflow will definitely feel a lot tighter. This is also the time where seeking Financial Advice becomes even more important.
Clarity
Have a good understanding of what your core expenses are each month, and what it costs you annually to run your life. You may need to review your current spending habits and make changes to adjust to a new level of expenses and understand when the bigger bills are due such as car registration and insurance. From this point decide how much you are comfortable holding as an emergency fund and find a higher interest account to house this cash. Liquidity is important, however since the interest rate in a bank account is not keeping up with inflation, keeping cash above your emergency level is not going to be beneficial in achieving growth.
Interest on Debt
With any non-deductible debt such as a home loan, effort should always be made to reduce the principal as much as possible to lessen the amount of interest repaid to the bank. With high interest rates come higher mortgage repayments if you are on a variable rate. Making higher payments than the minimum ensures that any increases will automatically be absorbed in the overpayments and therefore not have a negative effect your cashflow.
Utilise an offset account if possible so that high interest is being offset by cash holdings and you can access this money should you need to. Consider getting rid of any unnecessary debt such as a second car, boat or caravan which is costing you much more over the long run than when you decided to take out the loan. If you feel more comfortable having certainty around your debt you have the option to fix, however, if the variable rate drops below your fixed rate in the future, you may be stuck paying more than you have to.
Wealth Creation
Downturn markets can create the opportunity for overall improved returns. If you have an investment portfolio, then consistency is important so that you are dollar cost averaging into the market when share prices are lower than normal and then benefit from the growth when markets recover. Remember volatility in markets is normal and whilst the economy flows through its cycle there is the possibility to produce optimum returns if you are patient.
Appetite for risk plays a big role in deciding on wealth creation strategies. High interest means that rates for Term Deposits will mirror the increase. If you are confident, you will not need access to an amount of money for 6 or 12 months, then you can still earn a return and make progress on your cash with the right investment vehicle.
Retirement Planning
Reviewing your superannuation strategy is vital the closer you are to retirement and accessing these funds. Being within 5 or less years to retirement means that you may not have enough timeframe to recover any losses and how your super is invested becomes very important. Similarly, at any point in the accumulation stage, your asset allocation within your super account should reflect your timeframe to access and also appetite for risk. Coupled with any other available assets such as investment properties, considerations towards the property and economic cycles need to be observed so that you are in the optimum position for a fully funded, comfortable retirement.
Purpose and Patience
Although it may not feel like you are making as much financial progress as you would like right now or have even gone backwards, remember your purpose and the goals that you have. If you have a goal of growing wealth, now is not the time to sell and liquidate if returns are low. Even if in a smaller capacity, continue to direct resources towards your goals and making progress no matter how small. Giving up now or planning to readdress your finances at a later date will delay or even freeze your progress and have a negative impact on your overall long-term wealth.
Stick with your financial plan and maintain good financial habits now that will reap rewards once inflation returns to “normal” and interest rates deflate. Adjust discretionary spending and continue to direct money towards debt reduction and wealth creation to continue with progress and as the economy recovers so will your finances.
To check if you have everything in place to support your future financial goals to accommodate all market conditions including uncertain times, please contact our team for an initial Discovery Meeting.