Finance expert Mark Bouris’ has a few tips for keeping your money safe as inflation soars
With the cost of living, interest rates and inflation on the up and up, financial expert Mark Bouris has revealed his “red line” strategy to save cash.
Inflation will very likely hit 7 per cent by the end of 2022, which means there’s more than a fair chance there will be further interest rate hikes passed on to you the borrower before the end of the year, as the RBA attempts to rein spending in order to keep inflation in check.
This is not good news, but there’s no way the Reserve Bank could sit back and do nothing.
We’ve all benefited from cash rate lows of 0.1 per cent. But with it now at 1.35 per cent, a jump that has happened in just three months, you can bet that there’s more to come.
As that rate is passed on to anyone who’s borrowed money and doesn’t have a fixed rate, what can you do to safeguard your investments and where should you place your cash?
1. Think long-term, not short-term
If you have a thoughtful, long-term investment strategy, there’s no need to “chop and change” it just because interest rates are going up.
The worst mistake you can make as an investor is selling when the market has bottomed out or make rash decisions that could result in you missing out on potential returns. A lot of Australians who took the opportunity to withdraw money from their super funds when Covid first hit, missed out on one of the best years for super returns.
If you’re looking to invest for the next 10 to 20 years, it’s best to ride out the interest rate hikes that are coming our way.
That said, if you have a shorter-term “investment horizon”, maybe close to retiring, it may make sense to be more cautious and reduce your exposure to “riskier” assets such as shares.
Although property is more vulnerable to rising interest rates, some of these investments could benefit.
Rising inflation is good news for property investors as it could lead to higher rents, which in turn could generate large enough returns to offset the negative effect of higher interest rates. Tight leasing markets and the prospect of higher yields and long-term capital gains should sustain interest in investment properties, despite rising interest rates.
With vacancy rates at an all-time low, now could be a good time to offset interest rate rises by buying more investment properties that will yield great cash flow.
As borders have opened up, we’ve seen an increase and influx of expatriates returning home. Add to this a drop in construction approvals and the government ramping up migration to assist the economy post-Covid – rents will continue increasing significantly in many locations over the next few years, helping to reduce the impact of the rate rises.
If you take out a loan to purchase a rental property, you can claim the interest charged on that loan, or a portion of the interest, as a deduction. However, the property must be rented, or genuinely available for rent, in the income year for which you claim a deduction.
It pays to speak to a professional mortgage broker who can help make an assessment of your options with regards to repayments and future lending.
All the things I’ve mentioned above are food for thought at one end of your balance sheet, but don’t forget what’s going out at the other end.
My mum used to say, “Take care of your pennies and the pounds will take care of themselves”. Like most motherhood statements, this one is true and makes for good practice right now.
I’m making a list of those ongoing subscriptions I’ve picked up over the last few years and unnecessary money I’m spending in the cloud. It’s a leaner time now and I’m drawing a red line through those that I don’t need or can do without. I suggest you do the same. Make it a habit, not just something to do when times get tough.
There’s a famous Rudyard Kipling poem called If that begins with the words, “If you can keep your head when all about you are losing theirs …” Right now, it’s time to heed those words. Don’t lose your head, keep it sane, simple, straightforward and you’ll come out the other side of this.