Money smarts while interest climbs

Inflation and interest rates are buzzwords peppering headlines, and some commentators are painting a grim picture. So what’s inflation, can interest rate hikes cool the inflation jets, and how can we be mindful with money? 

Strange economic forces have been at play since the global financial crisis, which exposed banking issues. Since then, we’ve benefited from cheap energy, cheap goods from China and all the components that grow business profits. While Aotearoa side-stepped the worst GFC ripples, we weren’t immune to a global pandemic. Covid triggered a domino of problems. 

It slowed once-flowing supply chains, created shipping bottlenecks, caused immigration-related labour shortages fueling wage hikes and saw central banks like the US literally print money. As a result, the New Zealand dollar’s been on a rollercoaster.

Last year our Reserve Bank increased the official cash rate (OCR) by 0.25 per cent  in a bid to slow inflation. The OCR triggers interest rates rises and falls, like for mortgages. Currently, it’s at 1 per cent, but some Kiwi banks reckon it could rise to around 3 per cent over the next year, and they’ve hiked up mortgage rates in anticipation. 

Why raise the OCR? Because it slows inflation. Inflation’s the cost of living – goods, like food and petrol, and services, like haircuts and taxis. It’s measured by the consumer price index (CPI), which tracks the cost of a “basket” of items used by the average Kiwi – like milk, bread, petrol and haircuts compared to one, five or ten years ago. And right now, inflation’s sweltering at 5.9 per cent. 

High inflation hurts vulnerable, lower-wage and elderly people, destroys savings, increases borrowing costs, forces higher wages and increased welfare payments to keep up with the cost of living, makes exports less competitive and creates business and social anxiety. But as with much in life, you hold the power. Here are three ways to take charge of your money in 2022.

1. Adapt to mortgage increases.

Higher interest rates mean you typically can borrow less money for a first home or renos and could expect higher repayments for the same money as last year. Good news is, because banks have done their homework on borrowers, Kiwis are almost all likely to adapt by tightening belts and shopping around for better interest rates and terms.

2. Cool household spending.

While things are more expensive, you may re-prioritise how you spend your money. Because your grocery shop and the car ride there costs more, you might skip takeaway coffees, slim down to one (or no) streaming services and halt big purchases, like a new car.

3. Start hatching tomorrow’s long-term wealth.

While keeping your rainy day pot full is important, to grow long-term wealth, investing can supercharge your money. By investing 10 years or longer, you could reap the benefits of compounding growth, which is interest on top of interest that grows exponentially. Consider investing in a fund that spreads your money across hundreds of companies in one go. You could try techniques like auto-investing a set sum every pay day, or dollar-cost averaging, where you choose your top investments and spend at a fixed dollar value each time on those shares.

Be confident that however the economy moves, you’re in charge.

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