WILL HIGHER LIVING COSTS IMPACT YOUR NET WEALTH?
We had been happily living for some time in a low-inflation world with very low interest rates. We enjoyed access to cheap money, using that cheap money to buy more stuff. Some of us have bought houses, others cars, and many have invested in recreational vehicles and pursuits we enjoy.
But like most good things, that low inflation world came to a screeching halt. We’ve mentioned recently that inflationary figures are on the rise, with the anticipated response being for central banks around the world, including our Reserve Bank, to raise interest rates. We hope that our Money in Minutes guidance has given you some food for thought as to how you can get on the front foot to address what’s best for you.
We also now face the financial repercussions of the sad situation unfolding across the world. Energy supply and energy security have become front and centre, and the implications of supply issues are being felt globally. Over time, we are seeing global business change focus with a more concerted effort on local supply and production (this costs more too).
So, we are all now faced with the reality that we have more of our after-tax income being allocated to living costs. If you do nothing, you will potentially have less surplus income to save and invest or save and pay down your mortgage and other debts. This may see you owning less assets, or perhaps having more debts, and ultimately less financial net wealth.
This, of course, isn’t good news. What is good news is, as always, there’s a lot you can be in control of. The first and foremost step in taking control is awareness, and we hope you are now aware of what is going on globally and how it ends up potentially impacting on your financial house.
We strongly encourage you to consider some of the actions you can take to get on the front foot with regard to rising cost of living pressures, and we will go as far as saying in our minds it’s a no-brainer to go back and now take stock of your spending plan.
A great spending plan needs to allocate cashflow for essential living costs, pleasures you “choose” to spend money on, and of course, you need to have savings, as without savings you’ll likely go backwards financially.
Higher costs are most likely to impact your essentials spending. In our mind, you have three options here:
(1) Look at ways to reduce your essential spending (either eliminate, replace or negotiate), and/or
(2) Acknowledge that you will need to tighten your belt when it comes to pleasurable choice spending (as there’s less money to now go around), and/or
(3) Reduce your savings, investing, and extra debt repayments (not an ideal option in our Dan and Dave minds but we get it!)
If you choose option three, you have decided to put less fuel into your financial house and you will impact your ability to continue to increase your financial net wealth.
At the end of the day, this becomes about making informed decisions and prioritising what is most important to you and your family. Perhaps that much needed holiday needs to take precedence over other financial wealth building exercises for now. And if that’s the case then great, as you’ve become aware, put thought into what matters most, and you’ve made what is a smart decision at the time.
In the case of a holiday, current circumstances may mean it makes sense to spend a little less on a holiday than you may have originally planned. Humans are great at adaptation, but sometimes our ability to adapt our spending is a little slow off the mark. That’s why we’re talking about it here, to put you in charge.
The only certainty here is change. And the current global events and macro trends will play out, and then they will change again, just like they always do. Good financial management starts with awareness and finishes with regular actions you take that are best for you and your family.
Cheers,
Dan and Dave
