If you’re double and triple-checking your statement after paying your monthly mortgage, then you’re certainly not alone. The inflation rate in Australia, coupled with interest rates now being at an eleven-year high, means that most Aussies are feeling the pinch in just about every corner of their budget.
You’ve worked hard to build your financial portfolio and a vital income source; a reduced surplus income doesn’t need to mean putting your financial future on hold. We discuss some practical measures that you can take to ensure that you can keep the financial ball rolling — even with costs trending uphill.
Why are budgets so tight at the moment?
For the typical employed Australian, chances are they’ve watched their budget increase much faster than their wages. Unfortunately for our back pockets, inflation has risen much quicker than wage growth.
The Consumer Price Index (CPI), which measures household inflation, rose 7.8% in the twelve months leading into the December 2022 quarter, however, in the same time period, wage growth in Australia only rose 3.4%. Combined with the cost of materials, the cost of food and petrol has increased, thanks to a combination of factors ranging from the lasting impacts of the pandemic to natural disasters and international conflict — the gap between wage growth and inflation is hard to ignore.
During periods of high inflation, the Reserve Bank of Australia (RBA) works to bring inflation back down to a suitable level and does so by raising the cash target rate. While this is excellent news for those with savings balances, for mortgage and investment loan holders, the cash target rate increases flow onto interest rate increases, meaning higher than usual repayments. If you hold an investment property, you may have already been approached by your property management team (or had the inclination yourself) to raise your rental price.
Rental increases are a double-edged sword, though. On the one hand, positively geared properties are able to further increase the cash flow being generated from their rental return. Similarly, negatively geared properties can close the gap between income and cost. However, for wealth accumulators who are still renting or looking to get into the property market, steep rental prices can seriously impact their ability to save for a home deposit or have a meaningful surplus left in their income.
Freeing up cash flow
It may seem easy from an objective perspective for others to prescriptively declare that we should simply ‘spend less’. While this strategy may work when the issue is overspending on discretionary items, for many at the moment, the problem is the cost of the essentials!
Here are some of our tips for freeing up cash flow:
Revisit your budget
The first step in budget revision should be to identify fixed line items in your budget vs. modifiable ones. For example, if your children attend private school or are required to pay education costs, these are generally non-negotiable and therefore represent a fixed cost. You may also be committed to a telecommunications or gym contract that can’t be changed without significant break-penalties; another good example of a fixed cost.
However, many aspects of a family or personal budget have room for movement. For example, multiple small items, such as entertainment or streaming platform subscriptions can equate to over $1,000 per year. For other families, lifestyle and habitual spending plays a major role in determining their discretionary cash use. This might include upgrading their electronic devices the moment a newer model is released, eating out several times a week, going on holiday to expensive or exotic locations, or choosing business class when flying. Fine dining and luxury goods can also incrementally add up over the course of a year.
Selectivity is the key when seeking to retain as much surplus income as possible. No one should need to sacrifice their lifestyle completely, however, small, sensible changes and choices regarding your discretionary spending can make a lasting impact on your cash flow during a cost-of-living crisis.
Shop around
Being a professional is often synonymous with being time-poor, however, if time permits, shopping around for the best deal on groceries, utilities, insurances, and even mortgage rates, can have a significant impact on your back pocket. Finding cost efficiencies that total $100 per week will amount to $5,200 relief in your budget over the course of 12 months. Downtime is important, especially for bustling professionals; taking a family vacation certainly doesn’t need to be off the cards. Signing up to receive information on air-fare sales or adjusting your holiday expectations can mean that you still access the quality time you need at a price your cash flow can comfortably afford.
Maintain Automations
We believe that maintaining habitual savings is the key to continued cash flow momentum. If you have an existing automation for your weekly, fortnightly or monthly savings, retaining the automation with an adjusted amount that fits more comfortably with your revised budget is key. By setting an appropriate savings amount and making it a non-modifiable or fixed line item in your budget (as we discussed earlier), you can cement savings as a financial priority and subsequently modify lower priority items within your budget.
The benefit of consistently saving during high inflationary periods is that rises in the cash target rate are reflected in the interest offerings on cash savings and investment accounts. Some banking institutions in Australia are currently offering 5.00% pa for a promotional period of time on their cash accounts.
Depending on your investment strategy, financial plan and overall portfolio, you may be able to leverage the RBA’s rate hikes to your advantage while simultaneously embedding robust cash flow practices through automation.
Avoid Bad Debt
‘Debt’ is a word that’s tarnished in the minds of many Australians. However, not all debt is bad.
Conceptually, ‘good’ and ‘bad’ debt can be characterised by the debt’s ability to benefit your long-term financial position.
For example, taking out a mortgage for a property that provides your family with a home and an asset that will likely appreciate in value over time can be considered good debt. This is particularly true when considering the cost of rental payments and the long-term benefits you receive from that expenditure. Similarly, opting to use the Government’s Study Assistance loans to support tertiary education may be considered good debt as it benefits you financially in the long run by providing qualifications to support employment and a life-long income.
Bad debt, on the other hand, is typically used to purchase assets that rapidly depreciate or that is purely for consumption. Credit card debt is a common example of ‘bad debt’; the interest charges can be incredibly high, usually on purchases for consumables or services that do not benefit the borrower’s long-term financial well-being.
It is common during periods of high inflation for Australians to use credit to maintain their standard of living. However, while credit cards and personal loans aren’t all inherently ‘bad’, placing further pressure and strain on a budget that is already stretched may cause lasting impacts.
At CFV Services, we can provide you with budgeting and cash flow advice to keep your budget reigns firmly in your hands so that you can drive your financial future forward without sending yourself backwards.
Reach out to the team to learn more about how we can help stability and longevity in your cash flow and budget, even through challenging times.