Strategies for a rising rate environment

Are you feeling the heat of rising interest rates?

It\'s natural to be concerned about how changes in the market might impact your finances, particularly with the Reserve Bank of Australia (RBA) lifting rates faster than we’ve seen in over a decade. But it’s important not to stress about these changes, and remember that on a long-term basis, interest rates are still relatively low, debt can be managed, and the volatility we are experiencing is creating opportunities in the market for astute investors.

In this article, we'll arm you with the knowledge and strategies you need to protect your money and stay ahead of the game. Whether you've got debt, investments, or savings, in this article we’ve got you covered. We'll show you how to manage your debt, make smart investment choices, and boost your savings in a rising interest rate environment. With the right plan in place, you can take control of your finances and come out on top.

Current rate environment

The current cash rate in Australia, as set by the RBA is 3.1%, which was as low as 0.1% in April of 2022, just nine short months ago. In Australia, we are now back at levels not seen since 2012, and it’s only natural that this is causing some panic amongst investors, and those with a mortgage, or other debts, given that we haven’t seen a meaningful rise in interest rates in such a long time.

This rate rise has been needed given the high levels of inflation that we’ve seen across a number of key areas, particularly driven by energy prices, labour shortages driven by a lack of immigration throughout Covid-19 lockdowns and travel restrictions, the challenges in China, which as the world’s manufacturing hub naturally causes issues, and the cost of a number of key inputs that have been driven higher by the Russia/Ukraine conflict.

Understanding the impact of rising rates on your finances

Rising interest rates can have a significant impact on your money, whether you're a homeowner, a student with loans from previous studies such as a university degree, or you’re just trying to save for the future. Here's the rundown on how higher interest rates could affect different parts of your financial life:

  • Debt: When interest rates go up, it will likely cost you more to borrow money. This can be especially tough if you've got a variable-rate loan, such as a mortgage or personal loan. Even if you've got a fixed-rate loan, you may end up paying more once the fixed-rate period comes to an end. Credit card debt can also get more expensive if interest rates rise, as the rate you pay on your balance can increase. Rising interest rates can also make it more difficult to borrow additional funds, reduce your borrowing capacity, and potentially restrict your ability to refinance your existing debt. It’s a great time to reach out to your mortgage broker to start reviewing your options if you haven’t done so already.
  • Investments: Higher interest rates can also shake up your investments, as they can affect the value of different types of assets. For example, rising interest rates might lead to a drop in bond prices, which we saw in 2022, as investors may be more likely to sell their bonds and move into higher-yielding investments. On the other hand, rising interest rates could be good news for folks who rely on income from investments, like dividends from stocks, interest payable on term deposits, and other money market investments.
  • Savings: The interest you earn on your savings accounts and other short-term investments could also be affected by rising interest rates. While higher interest rates could mean higher returns on your savings, it's important to remember that inflation can also rise as interest rates go up. This means that your money may not go as far as it did before.

Developing a plan to manage your debt

If you have high-interest debt, such as credit card balances, it\'s important to come up with a plan to pay it off as quickly as possible. Here are a few strategies to consider:

  • Pay more than the minimum payment: By paying more than the minimum amount due each month, you'll be able to reduce your debt faster and save on interest in the long run.
  • Consider debt consolidation or refinancing: If you have multiple debts with high-interest rates, consolidating them into a single loan with a lower rate can save you money on interest and make it easier to keep track of your payments. Similarly, refinancing a loan with a higher interest rate to one with a lower rate can also save you money in the long run.
  • Create a budget and stick to it: Developing a budget and sticking to it can help you get a handle on your spending and free up more money to put towards paying off your debt. Make a list of your monthly income and expenses, and look for areas where you can cut back or save money.

By implementing these strategies and finding a debt repayment plan that works for you, you can make progress toward paying off your debt and improving your financial situation.

Review your investment options and adjust where necessary

As interest rates rise, it's important to review your investment portfolio and consider how to adjust your strategy. Here are a few things to keep in mind:

  • Adjust your portfolio: Rising interest rates can impact the value of different types of investments. For example, bond prices may fall as interest rates rise, which we saw in 2022. This doesn't necessarily mean you should avoid bonds altogether, but it may be a good idea to review your portfolio and make sure it's diversified. This could also highlight opportunities in 2023 as we near the top of the interest rate rising cycle, creating some value opportunities in bond markets.
  • Consider longer-term investments: While rising interest rates can be a headwind for some investments, they can also create opportunities. For example, longer-term investments, such as stocks, may be more attractive in a rising interest rate environment, where quality assets can often be over-sold by panicked investors.
  • Diversify your investments: Diversification is key to mitigating risk in any market environment. By investing in a variety of asset classes and spreading your money across different types of investments, you can reduce the impact of market fluctuations on your portfolio.

By exploring different investment options and building a diversified portfolio, you can increase your chances of success and minimise risk in a rising interest rate market.

Maximise your savings

Saving money is always important, but it can be especially crucial in a volatile market or when interest rates are rising. Here are a few ways to make the most of your savings:

  • Build an emergency fund and review it: Having an emergency fund can provide a financial cushion in case of unexpected expenses or job loss. Aim to save enough to cover at least three to six months' worth of living expenses. I would suggest erring towards six months for those that have children, particularly where one parent is the main or sole breadwinner in the household.
  • Look for ways to save more money each month: There are many ways to trim your budget and free up more money to save. For example, you might be able to cut back on dining out, entertainment, or subscription services such as Spotify, Netflix, or even online sports channels. You could also try negotiating bills or shopping around for better deals on insurance and other expenses.
  • Save for the long-term: While it's important to have an emergency fund for short-term needs, it's also important to think about the long-term and save for goals such as retirement. The earlier you start saving for the long term, the more time your money has to grow.

By taking steps to maximise your savings and build a solid financial foundation, you\'ll be better prepared to handle any challenges that come your way.

Tying it all together

We've covered a lot of ground in this article, so let\'s do a quick recap of the key points and strategies for managing your money in a rising interest rate market:

  • Understand the impact of rising interest rates on different types of debt, investments, and savings.
  • Develop a plan to pay off high-interest debt and consider options for consolidation or refinancing where possible.
  • Explore investment options and consider the benefits of longer-term investments and diversification.
  • Maximise your savings by building or increasing your emergency fund, finding ways to save more money each month, and saving for the long term.

If you\'re feeling a bit overwhelmed by all this information, don't worry. There are plenty of resources out there, and you can book a complimentary, obligation-free discussion with me at any time. We can help you navigate the rising interest rate market and develop a plan that works for you.

So don't be afraid to seek out additional guidance and support. With the right strategies in place, you can take control of your finances and achieve your financial goals.

To Your Financial Success!

Jarrad Brown is an Australian-trained and qualified Fee-Based Financial Planner with Australian Expatriate Group of Global Financial Consultants Pte Ltd providing specialist financial advice and portfolio management services to Australian professionals in Singapore. Jarrad Brown is an Authorised Representative of Global Financial Consultants Pte Ltd - No: 200305462G | MAS License No: FA100035-3

Australian Expatriate Group is a division of Global Financial Consultants in Singapore providing specialist advice to Australians living abroad.

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General Information Only: The information on this site is of a general nature only. It does not take into account your individual financial situation, objectives or needs. You should consider your own financial position and requirements before making a decision.

*Please note that Jarrad Brown is not a tax agent or accountant and none of the content outlined here should be taken as personal advice. You should consult your tax agent and financial adviser to review your current personal finances and financial goals to consider whether this strategy is appropriate for you.

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