Let’s face it, there are some parts of the global economy that are in a bit of a mess. Think Greece, China, Syria, America, Panama, I could go on… One of the things we’re seeing as a result is slower growth in the price of the things we buy on a daily basis, things like petrol, milk, food, and coffee.
The good thing about this is that the sharp increase in the price of your morning cappuccino is being halted, but what does this mean for your money strategy and getting ahead?
The increase in price growth is also known as inflation, and when prices are growing slowly this is called ‘low inflation’. Low inflation is normally linked to low interest rates, which is what we are seeing in Australia at the moment, with cash savings returning 2%-3%.
The impact is that your savings at the bank aren’t generating the income it has in the past, which has the roll on effect of really slow growth of your savings. It makes you wonder if holding your money in cash is worth it at all… But what can you do?
Well, one of the good things about low interest rates is that it allows companies to borrow money relatively cheaply. And if a company is able to borrow money at a lower cost and then uses that money to make (smart) investments in the business, the company has the ability to make a greater amount than what would be possible if interest rates were higher.
The impact is that buying shares or share type investments such as managed funds can provide higher returns when interest rates are low, because as an investor, you benefit from part ownership of the company and the higher return they make on their business.
In the current low rate environment, this can be a great way to boost the income and overall return you receive on your savings.
Another area low interest rates generally impact is Australian residential property. In the past, we’ve seen low interest rates support growth in residential property prices, because of the fact people (like the companies) can borrow money at lower rates, then make (relatively) higher returns.
When people are able to borrow at lower rates, they’re more likely to borrow, and borrow higher amounts. Think about the opportunities and where property could fit for you.
It’s important to note that we’ve recently seen significant price rises in some East Coast capital cities, so it’s hard to imagine the momentum continuing at this same rate. But it does seem likely that in the current low rate environment, property prices will remain supported, at least in part, by lower interest rates.
Lower inflation and interest rates can also mean you might want to rethink your debt repayment strategy. When interest rates are lower, the benefit you receive from paying down a mortgage is reduced, and in the case of a tax deductible investment loan, the benefit is reduced further.
In some cases, you may benefit from using spare cash to invest instead of paying down debt. Using lower interest rates to grow your money faster is a great strategy.
As for your household budget, the slower growth in prices might help you afford an extra holiday, find more money for those overdue renovations, or even upsize your morning cappuccino!
In all seriousness though, take advantage of the opportunity provided by lower interest rates to get ahead faster. Opportunities are plenty in this environment, so discuss with your financial or investment adviser and make sure you’re set up to get the most out of your money!
Ben Nash is a Financial Adviser and Founder of Pivot Wealth, and helps young professionals make smarter money decisions.