What is the impact of inflation and interest rates on wealth building?
Smart investors want to stay on top of what is happening in the economy. This means keeping an eye on the inflation rate, which has steadily been on the rise due to increasing fuel prices, global supply chain issues and new dwellings.
A higher than expected inflation rate raises concerns about growing interest rates, with much debate on whether Australia’s Reserve Bank will move to hike rates sooner than the projected 2023-2024.
These variables in the market need to be taken into account when considering investing your money. In this latest video, Pete Sizeland, Head of Finnia Education, talks about the impact interest rates and inflation can have on returns.
What is inflation and why does it matter?
In Australia, inflation is often measured by the Consumer Price Index (CPI). The CPI measures changes in prices for household expenditures, such as food, transportation, and healthcare. It tracks the average cost of living and takes into account unexpected factors or short-term distortions to focus only on the growth of the economy.
The CPI has increased 7.9% over the last 12 months, which is the biggest increase in 40 years.
Both too much inflation and too little inflation can cause concern, as this demonstrates either an over-stimulated or slowing economy. The Reserve Bank of Australia will decrease or increase the cash rate in an attempt to keep Australia between the ideal 2-3% inflation rate.
The cash rate can have a complicated impact on investments and it’s worth getting an expert opinion on how it could affect your returns.
How can I protect myself from market variables?
It’s always important to make sure you are covering yourself with layers of protection, here are 4 layers:
- Cash reserves: will help address any immediate money crises that occurs, for example losing a job
- Get smart about the structures you have in place: structure your loan in such a way as to protect from risk
- Personal insurances: to cover you in the case of any emergency or unforeseen events
- Stay up to date with rule changes: get aware of the changes and their impact
Changes to the economy are inevitable. Don’t let it stop you from investing, get educated so you can make smart decisions.
If you want some expert advice on your unique situation, book a discovery call today. Get personalised tips on the best strategy for you to handle any changes that might arise.