Response to the interest rate cut

Waiting for the trickle - how savers are responding to the interest rate cut.

The sky isn’t falling

The Governor of the Reserve Bank of Australia (RBA) made an interesting comment about the decision to cut the cash rate in June. The Australian economy has reasonably good prospects*.

The economic sky isn’t falling! Their looming concern is weak inflation.

Good growth prospects, low inflation and a rate cut sound great. But what about the savers; people approaching retirement, retirees or people saving for life’s larger purchases such as a home? The benefits of the rate cut are expected to trickle down to savers through a stronger economy – eventually.

How long can you delay your retirement plans or wait before getting a start on home ownership?

Weak inflation and waiting for a rate-cut benefit to trickle-down hides other concerns. What if your financial plans and budget include more health care, child care, education or saving for a home deposit? These costs are increasing at a solid clip, not the lethargic average cost of living watched by the RBA.

The rate cut has made money lazy, and some savings goals are moving further away. Savers need a sensible approach to investing and, in some cases, a boost by borrowing in today’s low- interest rate environment.

Pulling the goalie

Ice hockey has a quirky rule . The coach can pull the defensive goalkeeper and add another attacker. If your team is behind then ‘pulling the goalie’ makes sense. It reduces the risk of losing the game**.

But most teams never ‘pull the goalie’ because it is seen as a high-risk move to leave your goal undefended. Many investors make the same mistake when thinking about financial risk and reaching their goals.

1. The mistake is to focus on the risk of an investment in isolation. Instead, think about how an investment changes the overall risk profile of your savings plan.
2. The mistake is to focus just on the short-term ups and downs in an investment’s value. Instead, think about the risk of not reaching your long-term goals – of not winning the game.

Tips about nets and leaks

Any investment needs to be carefully evaluated in the context of your overall circumstances. There are a couple of tips when thinking about borrowing to invest in today’s low-interest rate environment.

1. You can build an investment portfolio over time using your savings and some borrowed money. No need for a big-bang loan.
2. The periodic income or dividend from your investments could exceed the cost of borrowing at today’s interest rates.
3. Look at the net after-tax return on your savings. Taxes, as well as inflation, may be eating away at your chance of reaching your goals.
4. Consider whether putting any investment income back into your savings plan could be a better plan than leaking out into your everyday spending.
5. If your circumstances change you can quickly adjust your strategy.

What next?

The first ice hockey team to ‘pull the goalie’ ended up losing the game. The coach switched tactics way too late. Savers don’t have to wait for the trickle-down benefits of today’s low interest rates. They can take advantage through a considered plan of borrowing and investing.

If you have any questions, or would like to discuss your loan account, please contact your Relationship Manager or call Leveraged on 1300 307 807.