5 useful ideas to help you deal with high inflation and rising interest rates

Category: Australia & News

The financial website, Forbes, confirmed that over the 12 months to the end of March 2023, the Australian Consumer Prices Index (CPI) was 7%.

Although this is down from the high of 7.8% from December 2022, it’s still higher than at any other time since 1988.

Interest rates have also risen in the last year, with the Reserve Bank of Australia (RBA) raising the bank base rate to 3.85% at the start of May.

Putting up interest rates to supress consumer spending is an acknowledged way to keep inflation in check, but it does have the effect of creating a “double whammy” of rising prices and more expensive borrowing when it comes to your personal finances.

Given this, now may be a good time to review your financial arrangements to ensure you’re doing everything possible to weather the storm.

Here are some of the ways that high inflation and high interest rates can affect different areas of your wealth, and some steps you could take to help mitigate the effects.

1. Review your household budget

With inflation remaining high, your buying power continues to be adversely affected. This means you might find it more difficult to keep up with regular living expenses once you’ve sorted mortgage payments or to pay off other debts.

To make matters worse, using interest rates to curb inflation typically means borrowing money is more expensive.

As a result, it makes sense to go through all your regular monthly outgoings and see where you can make savings and reduce your expenditure.

There may well be direct debit mandates you can cancel, or at least adjust so you’re paying less each month.

It’s also worth checking back through your recent discretionary spending to see if there are any regular outgoings you could cut back on for a short period.

Then, consider any major expenditure items you have coming up to see if they can be postponed, or even cancelled completely, to help ease your future financial pressures.

Some positive news is that the May RBA forecast for inflation reported in the Guardian suggested that it’s expected to fall to 4.5% by the end of the year..

This means that there may well be light at the end of the tunnel and the steps you are taking now need only be temporary.

2. Shop around for best rates on your unsecured debt

Keeping your debt under control and reducing it as far as possible is an important part of your financial management process, especially at times when interest rates and the cost of borrowing are rising.

Credit card debt tends to attract higher interest rates than secured debt such as your mortgage. Consequently, this will likely be a bigger strain on your finances and could easily mount up if you don’t keep it under control.

So, it may be prudent to prioritise paying down any credit card debt as far as possible on your financial to-do list.

If you can’t pay off all your debt, you could put a particular focus on reducing balances on higher interest loans and potentially look to consolidate debts using a less expensive form of borrowing.

3. Get the best rate you can on your savings

High inflation can erode the purchasing power of your savings. For example, an annual inflation rate of 7% means that goods that cost you $100 to buy a year ago will now cost you $107.

Conversely, higher interest rates should be reflected in better returns on your savings. This can, to an extent, help offset the effect of rising prices.

Because of that, it’s always worth getting the best rate you can on any savings you have that aren’t invested.

It can also pay to look out for fixed-rate offers, although you obviously need to ensure you aren’t locking money in such an offer that you may need to access at short notice.

It may be sensible to hold your emergency fund in an account that gives you instant access, but you can still look to benefit by making sure you’re getting the best rate you can.

4. Consider taking on more investment risk

Historically, investing has provided inflation-beating returns in the long term.

Due to the cost-of-living crisis, you may have less each month to put into investment arrangements you may have. However, it could be worthwhile trying to maintain regular investments if possible.

If you’re unable to do this, one option to consider is to take on more investment risk. By doing so, you can increase your potential upside in terms of returns, although this clearly goes hand-in-hand with the chances of seeing the value of your investments fall.

At times like this it’s often worth remembering the old investment adage: “it’s time in the market, not timing the market.” This is often described as the golden rule of investing.

Most investment professionals recommend that you look to keep your money invested for as long as possible to reduce the effects of potential short-term market volatility.

Often, the longer you can leave your money invested, the better.

5. Get expert advice

Getting expert advice can be crucial to ensure you get the best possible outcome as you plan your financial future.

Many financial arrangements can be complicated and, as a result, it can be helpful having someone with the appropriate expertise to help you make the right decisions in your circumstances.

They can also help you avoid financial pitfalls and mistakes that could prove irrevocable and leave you with – for example – an unexpected tax bill or severe losses on your investment portfolio.

This can particularly be the case at times when you may be unsure of your financial priorities and what the correct decisions to make are.

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If you have any queries regarding any the issues you’ve read about here, please get in touch with us.

Please note

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

This article is for information only. Please do not solely rely on anything you have read in this article and ensure that you conduct your own research to ensure any actions you may take are suitable for your circumstances. All contents are based on our understanding of ATO and HMRC legislation, which is subject to change.