“Australia’s interest rates kept on hold at historic low”*
“Interest rates will stay low until wages grow, says RBA governor”**
Over the past year, headlines such as these have been common. Both here, and throughout the world, governments have sought to make money as cheap as possible to stimulate their economies.
But cheap money also has another effect: Retirees who may have relied on income from interest on their deposits have seen cashflows dry up.
A very real problem is that the rate of return you may get from your cash is far less than the inflation rate. Therefore, if you have all your assets in cash, your real rate of return is actually negative and your money is losing value.
Your real rate of return is the return on your investment less the inflation rate. It takes into account the purchasing power of your money.
For example, you can buy a loaf of bread today for $4. You can invest that $4 in a term deposit which will pay me about an eye-watering 0.5% p.a. At the end of the year you have $4.02. The current inflation rate in Australia is 1.90%. If this stays true for a year, your loaf of bread now costs $4.08. The value of your investment in real terms has decreased.
What can you do about it?
There does not seem to be any respite in the near future for those who rely on term deposit and cash returns for income. For these investors, here are some ideas that may be worthwhile to put themselves in a stronger financial position. By no means are these ideas to be taken as advice; they are general ideas. You should seek advice from a professional to discuss these in light of your personal circumstance.
Make a Budget and Stick to it
There are two sides to your cashflow: Revenue and expenses. However, we can only control one of these. During this time of low cash returns, it is a good time to implement a strict budget. This may have been made somewhat easier by the international travel restrictions which surely have reduced your annual travel budget.
Review your Risk Profile
We often speak of our risk profile as personally driven. We seek a profile that we are comfortable with based upon our experience and mentality. However, there are certain situations where it is driven more by necessity. In order to generate an income we require we may need to look at other, sometimes more volatile, assets. It is the risk and return trade off.
If you are looking at reviewing your risk profile, it should be done with a professional adviser. This will ensure that you are fully educated during the process.
Look at your debt
If you have personal non-deductible debt such as a mortgage, credit card or personal loan, how much is it costing you maintain? If you are paying 3-4% on your mortgage or 10%+ on your personal interest and credit cards, this far outstrips your return on your cash.
By using your cash on hand to reduce loans, you are reducing your ongoing expenses and therefore putting yourself in a better net cashflow position.
The worldwide economic recovery is looking more and more to be a slow journey. Low cash rates internationally and domestically will be the norm for the foreseeable future. Those who rely on interest income may need to review their situation as returns remain low.
As with any changes to your financial situation, seeking professional advice at this time will give you peace of mind. Schedule a no-obligation Discovery Chat with us to explore how professional advice can help you.
The views expressed in this publication are solely those of the author; they are not reflective or indicative of RI Advice Group’s position and are not to be attributed to RI Advice Group. They cannot be reproduced in any form without the express written consent of the author. Louella Jorge is an Authorised Representative of RI Advice Group Pty Ltd, ABN 23 001 774 125 AFSL 238429. This editorial does not consider your personal circumstances and is general advice only. It has been prepared without taking into account any of your individual objectives, financial solutions or needs. Before acting on this information, you should consider its appropriateness, having regard to your own objectives, financial situation and needs. You should read the relevant Product Disclosure Statements and seek personal advice from a qualified financial adviser before you act