Millionaire's 'red line' money tip

Millionaire’s ‘red line’ money tip

Inflation is very likely to hit 7 percent by the end of 2022, meaning there’s more than a fair chance more rate hikes will be passed through to you the borrower before the end of the year as the RBA seeks to rein in spending to rein in inflation keep.

That’s not good news, but there’s no way the Reserve Bank can sit back and do nothing.

We’ve all benefited from cash rate lows of 0.1 percent. But now at 1.35 percent, a jump that’s happened in just three months, you can bet there’s more to come.

Since this rate is passed on to anyone who has borrowed money and does not have a fixed rate, what can you do to protect your investments and where should you put your money?

1. Think long-term, not short-term

If you have a well thought-out, long-term investment strategy, you don’t have to “cut and change” it just because interest rates are rising.

The worst mistake you can make as an investor is to sell when the market has bottomed, or to make rash decisions that can cause you to miss out on potential returns. Many 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 want to invest for the next 10 to 20 years, your best bet is to ride out the rate hikes that are coming.

However, if you have a shorter-term “investment horizon,” perhaps approaching retirement, it may make sense to be more cautious and reduce your exposure to “riskier” assets like stocks.

2. Build your cash savings

Keeping cash in the bank when interest rates rise could be a safe option that generates some income.

Six to 12 month term deposits are a safe option for those with available funds, although some savings accounts offer higher interest rates if funds are deposited regularly.

Be sure to shop around for the best deal, as returns vary widely between institutions. And before committing to a fixed deposit investment, it’s wise to consider your other investment goals during the time the money is locked away.

3. Property

Although real estate is more vulnerable to rising interest rates, some of these investments could benefit.

Rising inflation could be good news for real estate investors as it could lead to higher rents, which in turn could generate high enough yields to offset the negative impact of higher interest rates. Tight rental markets and the prospect of higher yields and long-term capital gains should keep interest in investment property despite rising interest rates.

With vacancy rates at an all-time low, now could be a good time to offset rate hikes by buying more investment property that will generate great cash flow.

As borders have opened, we have seen an increase and influx of emigrants returning home. Add to this a drop in building permits and increased government migration to support the post-Covid economy – rents will continue to rise significantly in many locations over the next few years, helping to mitigate the impact of rate hikes.

It’s worth speaking to a professional mortgage broker who can help you evaluate your options for repayments and future lending.

4. The stock market

Always a riskier proposition but potentially some of the highest returns.

Remember that past performance is not a reliable indicator of future performance and great care should be taken when selecting stocks.

Many people seek the assistance of an experienced investment advisor to do this for them.

5. Jumps

Fixed income assets such as government and corporate bonds are often considered to offer relatively stable and reliable returns.

When you buy a government bond, you are essentially lending money to the government, which they are repaying to you with interest. Interest is paid to you in regular installments over the life of the bond.

Fixed income assets might be considered boring by some investors, but having them as part of your investment portfolio can help offset any ant losses you may have suffered from the stock market – hence its classification as a “defensive” asset.

… and a thin red line

All of the things I mentioned above are food for thought at one end of your balance sheet, but don’t forget what comes out at the other end.

My mom used to say, “Watch your money and the pounds will take care of themselves.” Like most maternity claims, this one is true and good practice right now.

I make a list of the ongoing subscriptions I’ve had over the past few years and the unnecessary money I’ve been spending on the cloud. It’s a leaner time now and I’m putting a red line through those I don’t need or can do without. I suggest you do the same. Make it a habit, not just in difficult times.

There is a famous poem by Rudyard Kipling yew which begins with the words, “If you can keep your head when everyone around you is losing theirs…” Now is the time to heed those words. Don’t lose your head, keep it reasonable, simple, direct and you’ll come out the other side of it.

Mark Bouris is Executive Chairman of Yellow Brick Home Loans. Visit the Y Home Loans website for more information on getting the best home loan, refinancing and some of the industry’s leading expert tips

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