Welcome to Cheques and Balances, I’m Michael Vincent, this is James Blair and this week – How to tackle 2023.
Weather forecasts aren’t looking great for 2023. Economic forecasts aren’t looking much better.
According to recent reports, 57% of ANZ’s mortgage customers are expected to see a hike in their interest rates from 2-3% to 6-8% this year. This increase in interest rates is likely to add another $30,000 in yearly expenses for some individuals.
In the last 12 months, interest rates have already tripled and are projected to keep increasing for at least the first six months of 2023.
The job market is also expected to slow down with less job hopping and fewer counteroffers as the demand for talent and supply of candidates balance out. As a result, salary increases are also expected to be less common this year.
A LinkedIn survey of 3,000 global c-suite executives showed that 68% believe a looming recession will force their companies to undo some of the progress made towards flexible working during the COVID-19 pandemic.
So, what can you do to prepare for these challenges? Here are some tips to help you manage your finances in a world of high interest rates and rising unemployment:
Create a budget
Knowing where your money is going is key to managing your finances. Having a budget in place will help you stay on top of your expenses and ensure that you are moving toward your financial goals. There are multiple ways to budget, depending on what works for your personal situation:
- Zero-based budgeting – allocating every dollar of income to specific expenses and savings goals.
- Envelope budgeting – allocating cash for specific expenses in designated envelopes (or accounts).
- 50/30/20 rule – allocating 50% of income to necessities, 30% to personal spending, and 20% to savings.
- Reverse budgeting – starting with savings goals and allocating remaining income to expenses.
Review your expenses
This is a good time to examine your spending habits and look for areas where you can cut back.
- Trim discretionary spending – cut back on things like dining out, entertainment, and shopping.
- Review bills – look for areas where you can save on monthly bills such as insurance, cell phone, and utility bills. A great online tool for this is NZ Compare.
- Eliminate subscriptions – review your recurring expenses and cancel any that you no longer need or use.
- Shop for better deals – look for better deals on household essentials, groceries, and other frequently purchased items.
Build an emergency fund
An emergency fund is a must-have for unexpected expenses such as job loss or medical emergencies.
If you don’t have one, start by saving $1,000 as fast as you can and then regularly contribute until you have 3-6 months’ worth of expenses in the bank. For self-employed or contractors, it’s recommended to have a 12 month emergency fund.
Reduce your debt
High interest rates can make it difficult to pay off debt, so focus on reducing your debt as much as possible. This may include consolidating your debt or negotiating with creditors for lower interest rates. If you have a mortgage, consider speaking to a mortgage broker for assistance.
A case study on mortgage advisers vs. bankers
2 sisters aged 32, had 2 investment properties on the North Shore in Auckland.
Due to interest rate roll-overs and a loss of interest deductibility, these clients had to find another $25,000 annually to top up their investment properties.
They were advised by the bank to sell one of the investment properties in order to free up cashflow and reduce their debt position.
They came to us for a second opinion, we did the following:
- Refinance both loans to Kiwibank
- Move to interest only for 5 years
- 1% cash-back utilised to bring one of the houses to healthy homes standard
- Rent one property to Kainga Ora – Being able to claim interest deductions
The clients were able to keep both investment properties. They only had to contribute $30 each a week to top up. They had the security of guaranteed rent and a fixed term on their mortgage.
Remember that economic cycles are normal and that this too shall pass, try to focus on things that you can control and take actions that align with your values and long-term goals.
What you shouldn’t do
Don’t panic – high interest rates and rising unemployment can be stressful, but it’s important to avoid panicking and making impulsive decisions. Instead, take a step back, assess your situation, and make a plan.
Don’t rack up more debt – high interest rates can make it more difficult to pay off debt, so it’s important to avoid racking up more debt. This may include avoiding unnecessary purchases, using credit cards responsibly, and staying away from predatory lending practices.
Don’t give up on saving for your long-term goals – high interest rates and rising unemployment can make it more difficult to save for your long-term goals, but it’s important not to give up on them. Instead, look for ways to cut expenses and increase your income to keep your savings on track.
Fall into get rich quick schemes – when your financial outlook isn’t looking great, it can be tempting to double down and invest into something more risky in the hope for more reward.
Don’t do nothing – take an active approach to your finances and take steps to improve your situation. If you don’t do something, nothing will change.
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