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Are Interest Rates Going Up?

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Are interest rates going up? In this article you will find out how interest rates work and why they might keep going up or what it would take for them to come back down again.

There is no doubt about it. This raising of interest rates has come at blinding speed which no-one was quite ready for.

Why are they going up?

One reason why the reserve bank is raising rates is to reduce the cost of living (inflation) from continuing to rise at such high levels.

It is crucial to a healthy economy to keep inflation at manageable levels. Which for Australia, is around 3%. Currently inflation is at 7%.

How does raising rates reduce inflation?

As the only tool in the reserve banks arsenal, raising interest rates reduces inflation by two factors:

  1. Increased rates mean money is harder to borrow. This takes the heat out of the ability for you to use debt to expand your business or pay more for assets.
  2. Increased rates means disposable income is lower. If your loan just went from costing $20,000 to $50,000 then you just lost that ability to spend or save $30,000. This also reduces the demand in the market for goods and services.

When will rates stop rising?

Rates will get getting higher if inflation stays high. There has been only a small effect on inflation with the recent rate rises. This has forced the RBA to keep raising them. The RBA will likely stop when either:

  1. They break something. (a lot of people are saying that has already happened in the banking sector recently)
  2. They see a material effect on inflation. This is trickier because a lot of our inflation is caused by a shortage of goods (like petrol) across the globe.

When will rates come down again?

We will probably see rates fall when the economy starts to contract and people stop spending. Look at the graph below. We have seen rates fall every time that there is a recession and inflation is below 10%.

 

What should you do?

If you are stressed about your interest rate, it is important to know your options.

  1. You can bury your head in the sand. I don’t recommend this.
  2. Be proactive with your rate and borrowed amounts. In tough conditions is where there are the most opportunities. Check your rate is competitive. At the time if writing, 5% is a competitive rate. Also, check that your going to be ok if interest rates keep getting higher. Knowledge is power and if you find out that you are over extended then you can do something about it now. If not, then you can rest easy knowing that you are ok.

Let me know if I can help.

I have a few tricks up my sleeve when it comes to debt and assessing if you are over extended or not. If you aren’t sure where to start then reach out by booking a time HERE. We can discuss your situation and what needs to be done to safeguard and then take advantage of current market condition.

If you haven’t already, you can also read our article on the value financial adviser add HERE or download our helpful guide.

 

Pay off the mortgage early or invest? Which is better?

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Pay off the mortgage early or invest? Which is better?

Should I pay off the mortgage early or invest and save for retirement? This is one of the most asked questions I get as a financial advisor. Accordingly, it’s also one of the most relevant and crucial questions that need to be answered for each person. The good news for you is that there is a definitive answer depending on what stage of life you’re in.

Paying off the mortgage

We all love seeing the amount of money that we owe to a bank reduce. Being debt free is possibly the number one criteria for someone being able to call themselves financially free.

What are the benefits?

  1. In a high interest environment (like we currently have) you’re saving around 5-6%. That means you have effectively guaranteed return on your extra payments of five to 6% (for the average investor that is similar as the 20-year average growth rate.)
  2. There is no tax on money saved. For every dollar of interest earned you get taxed at your marginal tax rate. When you make extra payments, whatever you saving on the interest rate is not taxed.
  3. You gain more equity. How do you pay off more of your home loan? You get more access to the equity within the home. If you have a redraw or offset account you may be able to pull that money out pretty quickly as cash.

You don’t get access to growth.

Investments can provide something that paying off your loan never can. Compounding growth.

There are two major benefits that you can take advantage of when you invest.

  1. Finding the best assets. average rates of return usually reflects the environment and markets at the time. in high interest rate environments where your return on cash is high there needs to be extra incentive for people to invest their money into things like property and stocks. Otherwise, why take the risk, right?
  2. Future opportunities. Paying of your debt usually doesn’t result in being able to create long term passive income. Having the right kind of investments that have compounding growth and the ability to create income is unique to things like stocks and property (and their variations)

What should you do?

This is an easy question for most of my clients and the people I work with.

If you are under the age of 55 and you aren’t both paying off your debt and setting aside some money to invest, then you’re absolutely insane.

However, if you’re over the age of 55, what you should be doing becomes a question of how you want to retire. Most people will retire at around 65 to 67 years old. Retiring with debt and no income to pay it off will set an awful tone the beginning of your quieter years.

Where this general advice differs is if there are benefits you can undertake that have extra advantages over and above the average investment rate of return. Such as borrowing extra money to invest, investing using your super and getting incredible tax benefits (see our article on saving tax HERE) and investing in high growth strategies that are likely to outpace the average investment return over time.

What you need to know before you act

Whether you decide to pay off your loan early or you decide to invest, you need to be aware that there may be dire consequences of doing either action that may not come to fruition until years later.

So don’t be silly… don’t put all your eggs in one basket. Spread your money around and get good advice.

So, book a time for a 20 minute chat by clicking the link here so we can work out what is best for you.

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Silicon Valley Bank – What’s Going On?

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So what’s happening with markets at the moment?

If you haven’t seen already, about three or four days ago markets started to drop, and they started to drop pretty heavily. Over the last week, we’ve wiped up nearly all the gains that we had from about November last year.

So what has done that and what’s actually the problem?

It’s really a throwback to some PTSD from the global financial crisis. A bank run is what’s happening right now. We saw this happen with a cryptocurrency holder/stock platform, a major tech bank called Silicon Valley Bank.

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So what actually happened?

So what’s actually happened? What does it mean? And really, what are the likely outcomes and what you should do about it? What is it that you should be undertaking at the moment to make sure that you secure your position and keep growing your wealth, because at the end of the day, that’s what I’m here for, and that’s what we help our clients do.

The facts

What happened is ultimately a bank run. It happened to the 13th largest institution in the US at the moment, called the Silicon Valley Bank.

A bank run is effectively when a whole bunch of people need to take or want to take their money out all at once from a bank. In this instance, people got spooked, and we had a situation where the Silicon Valley Bank needed to cover off a number of their losses that have happened through rising interest rates, so they started selling off assets fast, and people got wind of that.

People started saying, “Hang on a minute, I want my money!”, and when everybody starts to say that, the bank starts to get into a whole bunch of trouble.

The reason being is that the bank doesn’t hold every dollar that you’ve deposited in there in cash in a vault anymore, we’ve moved beyond that as a banking system. Banks will invest your money and lend it out, and sometimes in order to cover off what they need to hold as a minimum in their bank, they need to start selling off assets. So that’s exactly what happened.

So what’s the problem?

Why people are getting really upset about that and why it’s causing a whole bunch of drama is really because they’re not sure whether or not this is going to be a contagious issue. There’s a lot of rickety movements at the moment happening in markets, where banks all around the world are wondering if there’s going to be another bank that starts to domino and does the same thing as people become more and more spooked.

They’re wondering if it’s going to happen to another bank, what’s going to happen to their bank, and what we can start to see happen is what started to happen in the global financial crisis as well. We started to see bank runs across the board, where people are starting to try to take more and more money out and the banks are having to sell assets at a loss to cover their positions at an alarming rate.

So we’re heading to a GFC?

The good news is that so far, it doesn’t look like that’s happening. You won’t know for sure until maybe the next few weeks. It could even be a couple of months before things start to get a little bit more on solid ground. If it doesn’t catch on, if it’s not a contagious thing, if it’s not something that is going to affect other banks, then there shouldn’t really be too many dramas and most of what we’ve seen fall off the market should pick up pretty nicely and come back over the course of the next little while.

If it does turn into a contagious thing, and we start to see other banks domino, depending on their size, we’re going to start to see some big problems and some big movements in markets. The reason being is people have that PTSD – they have flashbacks to the GFC, where asset prices dropped by 35 to 40%, and banks needed to be bailed out.

It’s really important to keep in mind that this is the biggest bank failure of this kind since the Global Financial Crisis and the Washington Bank collapse, which was really the catalyst for the 2008 GFC, which is why people who remember that time are starting to worry.

Do we need to worry?

One of my favorite sayings when it comes to investment markets is that nothing is usually as bad or as good as they’re saying it is. We’re not going to know exactly what’s happening for a little while, and quite frankly, I don’t think you should be too concerned about it.

There’s going to be a lot of beat up in the media about this, there’s going to be a lot of naysayers and doomsday people who always are predicting market crashes, and we are going through challenging markets, there is no doubt about it.

But ultimately, I don’t think this is going to be a major contagion. That being said, I could be wrong. I have a very optimistic view of the markets over the next 12 months or so, and if you’re one of my clients, you’ll know that my feelings are that the banking sector is actually doing pretty well. The major issue facing banks at the moment is the completely ridiculous increase of interest rates that don’t need to happen, because the issues facing them aren’t actually the issues that they’re addressing.

So what’s the plan?

So what does it actually mean for you.

What you’re going to see is your portfolio rising and falling, and some market volatility. I was hoping that this year would be completely free from market volatility, and we’d be on the up and up, but here we are.

What you can do about it

What should you do about it? Well, there are three things that you can do about it:

  1. One is that you can leave your money where it is, and you ride the highs, you ride the lows, and you continue investing over a long period of time. You take an unemotional outlook to the investment markets, and you treat these investments just like you would any other long term investment, like an investment property, where you hold it through thick and thin and we have a long term view.
  2. Option two is that you panic, you go nuts and you want to sell everything or you want to reduce your position. This is the this is not something I would recommend that most people do, as short term market fluctuations don’t mean that you should be panicking, selling and changing direction. You should only be looking at reducing your overall exposure to markets if you need to fund income, which if you’re one of my clients, you normally have about two to three years’ worth of liquidity within portfolios to protect you against exactly this kind of thing happening, and needing to sell down during periods of time like this.
  3. The third thing to do is to look at the opportunity and figure out how we can actually put more money into investments whilst they’ve depreciated in price. For example, nothing has really changed that dramatically for the Australian banking sector, and yet most of the Australian banks and Australian financial institutions (which are some of the largest players in the Australian stock market) are down by 2.5% to 3.5%. If you can start to take advantage of these things, then that’s probably a better solution than the alternative, which is to panic sell.

For my clients:

If I haven’t already reached out to you advising you exactly what it is that you should be doing, then the answer that you should be holding on and hold on to our seats. We take the good with the bad and we are adding money into these investments over time, which ultimately will reduce the overall cost base and provide a greater market return over the long term.

What’s next?

If you haven’t already, I would love for you to hit Like and Subscribe and follow us. This ensures that you get this kind of news right into your inbox or straight onto your phone as soon as that happens.

To my clients, we put this out to make sure that you’re aware we’re on top of things, and we’re informing you of what’s going on and what you can do.

If you have any questions, please don’t hesitate to let us know. You can get us on 1800 577 336, hello@wealtheon.com.au and you can visit us at www.wealtheon.com.au. To book a time in directly with me, you can get in touch here. If you need anything, please don’t hesitate to reach out and we can help you out where we can.

References & Other Articles To Check Out:

Is Financial Advice worth it?

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Is Financial Advice worth it?

If you ask Reddit if financial advice is worth the money spent then you will be inundated with hate mail about financial advisers. As a financial adviser myself, I know what I do for clients but I have been looking for hard data on how much value we really do add to people. You will see all of the anecdotal horror stories about how I am basically the devil.

Finally, I can prove to the keyboard warriors that my life isn’t a worthless waste of time.

Who has come to rescue my self worth? Funnily enough, there are actually two juggernaut investment managers who have looked at this area for the last couple of decades. Vanguard and Russell Investments.

Most recently (2022) Russell Investments calculated the value of a Financial Adviser. This cost was calculated to be at least an extra 5.8% per year. Most advice costs are between 1 and 2% each year which means the value added is around 3-6 times the cost.

This report really confirms what I know already… The reality is that financial advice is worth it for people who don’t have the skills, time or diligence to figure out how to navigate and utilise our very complex financial, tax and legal system to their best advantage.

Most of the people we work with know that there is a better way that they can run their finances than they can achieve themselves.

Here are a couple of highlights from the report, it was calculated and value categorised under 5 different parts with three of those with definable value adds:

  1. Appropriate asset allocation – Extra 1.6%
  2. Behavioural coaching – Extra 2.9%
  3. Choices and trade-offs – Variable benefits
  4. Expertise technical and emotional – Undefinable but considered priceless
  5. Tech savvy planning and investing – Extra 1.3%

This report is only taking into consideration benefits on a lump sum of money. Russel equated it to being $5,800 per $100,000 invested.

If I factor in strategies like our debt domino, automated savings system, parachute plan and passive income pathway. I am pretty confident we can blow even those numbers out of the water.

If you are wondering if financial advice is right for you, and you want to chat with one that can show you the value add before you make any major decisions. Then you need to click the link here and book in for a 15 minute phone call directly with me.

P.S Don’t get me wrong, I get that some people have had some bad experiences with advisers. I am not saying that there hasn’t been some bad eggs. That isn’t the norm anymore and most of those buggers aren’t advisers now. We threw them out 😉

Also, don’t think I have pulled this info from nowhere. I am not going to regurgitate the 14 page report. You can download it here: https://russellinvestments.com/au/financial-advisers/your-business/business-solutions/value-of-an-adviser#ColorBoxesRoot_9c51613d-d25f-489a-a265-9c08ea63e60b

If you liked this article and want more content from us, check out our tax savings through super blog here.

Disability Support Pension Problems – A Case Study

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Disability Support Pension Problems – A Case Study

If your client receives a personal injury compensation payment of around $500,000 after a workplace accident, it may affect their eligibility for a disability support pension.

Read on to find out how disability support pensions can impact compensation.

When a court awards a lump sum for damages, or your client settles on damages, this lump sum can result in a preclusion period. During this time, your client will not be eligible for income support payments like the disability support pension. If your client has previously received a Centrelink benefit during this preclusion period, they may need to repay the benefit received. However, your client may still be able to access the Health Care Card or Commonwealth Seniors Health Card during this time.

The length of the preclusion period will vary depending on whether the compensation amount related to economic loss can be identified. For example, if a compensation claim is contested through a court, tribunal, or arbitrator, the specific amount awarded for economic loss will be identified. This economic loss includes lost wages, lost capacity to earn, and lost superannuation contributions. On the other hand, an agreed lump sum through settlement will not typically identify how much relates to economic loss.

If the amount awarded for economic loss is known, the formula for calculating the preclusion period is:

Preclusion period = Amount awarded for economic loss / single income test cut off amount

The income cut-out amount is the amount above which no pension is payable to a single person under the ordinary income test. The single fortnightly income test cut-out amount is $2,243, and the weekly amount is $1,121.50 as of 1 January 2023. The preclusion period is the result of this formula, which is then rounded down to the nearest whole week. The income cut-out amount that applies is the figure that applied at the time the lump sum is received.

For example, if a court judgment specified that $200,000 be paid for pain and suffering and $300,000 for loss of earnings, the preclusion period is 267 weeks, or just over five years. This means the client will not be eligible for benefits such as JobSeeker, Disability Support Pension, or Age Pension until after this preclusion period is over.

If the compensation is via settlement and the economic loss amount is not specified, the 50% rule would apply. Under this rule, it is assumed that half the compensation payment relates to economic loss.

Preclusion period = Settlement amount / single income test cut off amount x 50%

For example, if a client accepts a settlement payment of $500,000 for injuries, $250,000 will be treated as compensation for economic loss. In this instance, the preclusion period will be 222 weeks, or just under four and a half years.

Centrelink’s compensation estimator can help to calculate the preclusion period for compensation settlement payments. For more information, please refer to the Income Test Info and Social Security Guide here.