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inflation and interest rates

Rising Interest Rates versus Overall Inflation

financialliteracy learnaboutmoney moneybasics Jun 17, 2022

There’s been a lot of talk lately about rising interest rates and there’s a lot of concern around what that’s going to mean for the family budget.

What the Reserve Bank is trying to do is curb inflation and pull back the rising cost of goods and housing.

With inflation officially sitting at 5.1% (the real rate is likely higher, especially for certain goods like fuel!), it is an issue that will impact us all. There is a housing crisis in this country, with the cost of rentals having been a problem even before this rate rise.

So, what can we do about it and how is the best way to be prepared for further rises in interest rates and overall inflation?

To know what it is we are spending our money on – to review our spending and make changes where needed. Right now especially, the cost of ignorance is high.

Rather than just rising interest rates, my bigger concern is the rising cost of other things like petrol, groceries, power, and water.  

While interest rates have started to rise, and this first increase of 0.25% will likely not be the last increase to come, there is a broader discussion about the cost of everything.  Interest rates on their own I don’t personally see as the primary cause of concern.

Another area that I feel is a cause of concern is the cost of housing. There’s also the potential for food supply issues which will drive the cost of food up even more.

In terms of the interest rates, there are a few things that you can do to try and reduce the repayments that you’re paying. Firstly, you can shop around. There is a lot of competition in the mortgage market, and a lot of variability in the interest rates that are charged.  Typically, the larger banks charge higher interest rates (there are more inclusions in their loan, which most of us don’t really need anyway).

Other financial institutions often have more competitive rates, so even if they do increase the rates by the 0.25% that the RBA has just increased interest rates by, you are still going to be paying potentially less than you would have if you were with one of the traditional banks.  So, it’s worth shopping around to see what other deals are out there.

The second thing you can do is to consolidate any personal debt that you’ve got under your home loan. Even though the interest rate for the home loan is going up, it is still going to be much lower than the interest rate on personal loans. So, reduce your overall debt spend by consolidating them all and pay a lower interest rate for those items. Then, cut up those cards or close those personal loan accounts (including Buy Now, Pay Later). Don’t use them again. Remove the temptation, so you don’t go back to where you were.

From a personal budgeting point of view, the shopping around concept still applies. When it comes to power providers, my husband is constantly shopping around for a better deal. It is amazing the variety out there. The competition is pretty strong, with a lot of providers so it is worth doing some research and checking out some of the comparison websites to see what’s available in terms of power bills that can be reduced.

The same thing goes for insurances. I’ll give you a brief example of what my experience was about six months ago. I rang my insurance provider, and I have home insurance contents insurance car insurance with the same provider. I have to admit it annoys me a bit when I see companies advertising special deals for new customers. What about your loyal existing customers?

And this is exactly what I said when I rang up my insurance company and spoke to them. I asked for a loyal customer discount. It would save me going elsewhere and going through all that work of setting up a new set of policies. It also saves them the overhead involved with looking for new customers.

Most companies want you to stay. So, we reviewed my policies, made some slight increases to the excess amounts that I had. They gave me a loyalty discount, and also a discount for having 3 policies with them. It was a 30 minute conversation, and I saved just over $700!  So the lesson here is, if you don’t ask you don’t even know or get. All they can do is say no, and you’re no worse off!

When it comes to groceries, trying to limit food waste is probably one way. I know that is a hard thing in my household. I throw away too much food. It’s not just the money that I feel like we’re throwing away, it’s also the the waste of the food itself. I do realise this is a harder problem to solve though. Always something to aim to improve.

In terms of a weekly shop, and the things that you buy, there are lower cost supermarkets like Aldi. Then you could also shop with what is in catalogues on sale. Online grocery shopping is a great way to stay within your budget. It’s a lot easier to budget when you’re able to see what your total spend is. When I go to the supermarket, I always come back with extra things. Sometimes it’s things that are on sale that I know I’ll need in the lot too distant future. But then there are impulse buys which I’ll just throw in the shopping trolley, and it’s quite often things that aren’t really necessary. So a way to combat that is to do your grocery shopping online.

At the crux of it, being more organised and having more of an overarching plan for your money which you could turn into a budget or at least buckets of money for certain things is the best way to save money. Making things simpler by consolidating expenses as much as possible, reviewing things regularly, and actually being on top of your finances. This is instead of just letting things go and you have no real idea or control over what you’re spending. It may seem a lot of work and to start with it probably is, but it’s worth it.