Seven ways to safeguard your savings against recession

safeguard your savings against recession

It’s likely no surprise to anyone that interest rates are on the rise. But living with this reality has probably come as something of a shock.

Before the current upswing, it had been 11-and-a-half years since the Reserve Bank of Australia last lifted the official rate. We had all become very used to interest rates going down and then, during the COVID years, flatlining at record lows.

Now everyone with a mortgage, credit card, car or other loan, is suddenly – and somewhat unexpectedly – having to pay more.

Add to that ballooning inflation making our living costs explode, and it’s no wonder that many Aussies are wondering how they can protect their savings and still afford to keep the lights on.

We can’t count on winning Lotto (though hope springs eternal!). What we can count on though is a solid plan.

Consider this your seven-step strategy for safeguarding your savings:

Spending plans

I’ve never liked the word ‘budget’. If you’re like me, you get a shiver down the spine every time you think of it. It just sounds unpleasant, painful even.

Instead, I prefer the term ‘spending plan’, one which shows not just your bills but the fun and positive spending too, including money going towards investments and savings.

Don’t stick with just one version though – have three. Like traffic lights:

  • Red – your plan for surviving on the absolute bare minimum. This is about keeping you alive, fed and sheltered should you face a financial catastrophe. No room for luxuries here.
  • Amber – the ‘tightening your belt’ plan. Look at where you can quickly and easily trim costs, such as cutting down on eating out, buying cheaper brand groceries, cancelling Netflix or other lifestyle subscriptions.
  • Green – the desirable plan where you’re living comfortably.

The point of having three plans is to scrutinise your spending and break it down into must-haves, good-to-haves and want-to-haves. This will help you to identify potential ways to make cuts to adjust for higher repayments.

You’ll also find it beneficial having them ready to go should your circumstances change suddenly and you need to respond quickly – such as redundancy or illness.

Income safeguards

Spending plans mean little if you have zero money coming in. Consider all your sources of revenue and ways to protect them.

  • Paid work probably accounts for the bulk of your income. Protecting your ability to earn that income may involve income protection insurance; gaining extra qualifications to make yourself more invaluable within your current work and more employable elsewhere, or perhaps making a career change into an industry with more job security, better long-term prospects and potentially even higher pay.
  • You may own an investment property – insurances may be your best tool to protect the property itself as well as the income it produces in the form of rent.
  • Other investments could be a source of passive income such as share dividends, company profits, or trust payments. Professional advice may be your best form of protection to ensure they are structured properly – including your financial adviser and accountant.

And if you have only a single source of income, remember the saying about all your eggs being in one basket – what if the basket falls and all those eggs break? So, it may be time to diversify, so that you are generating multiple income streams, making the unexpected loss of one less catastrophic.

Loans review

Now turn your attention to the actual source of your insecurity about interest rate rises – your loans. Even with your rates going up, you may be able to reduce how much you have to pay.

Where you have multiple loans – say a mortgage and a car loan – it may work out cheaper to consolidate them into one. That is because mortgages generally have a lower interest rate than other types of loans. But overall interest will depend on the length of time you pay it back.

Refinancing is another option. Do some shopping around or speak to a mortgage broker to see how you could get a better deal with another lender. Then ask your current lender to do better – they should match or even beat the cheapest alternative, because from their point of view giving you a discount is cheaper than losing you as a customer.

Downsize your debt

While you’re looking at money you owe, consider any other debts you have.

Again, refinancing may be a worthwhile means of reducing your total interest bill.

If you’re able to, consider paying off smaller debts altogether. It will free up cash in future to meet higher mortgage repayments, and you may even get a discount for early repayment.

Make use of what you have

Chances are you have other sources of money that you could be using to meet higher interest rates.

Credit card, store loyalty card and Frequent Flyer points can be worth a fair bit of money. Some allow you to convert points into cash. However, you may get more value by using these points to pay for household essentials, which will free up your cash to make repayments.

It’s also tax time – getting your tax return done ASAP means you’ll receive your refund faster, which can go towards your loan, reducing your outstanding balance and also the interest you’ll pay in future.

Find the silver lining

A rising interest rate isn’t necessarily a bad thing. In fact, it’s actually a really good thing where savings are involved.

While interest rates were at record lows, the interest on savings accounts was pitiful. Rising rates allow you to earn more savings accounts and term deposits.

Perhaps it’s time to revisit these and see what money you could be making from the bank instead of the other way around.

Avoid temptation

The biggest safeguard for your savings is simple – avoid the temptation to dip into them to pay your bills.

Why undo all your hard work in building up those savings and then not getting to put them towards what they were intended for?

An emergency fund should be your go-to if you’re really struggling, not your savings. That emergency fund should be solely in your name, in case your relationship breaks down or something else happens, and be easily accessible. Then you can replenish those funds once the emergency is over.

So, avoid the temptation to dip into your savings to meet higher repayments. It’s easy to tell yourself ‘I’ll just take this amount now and pay it back a bit later’. Chances are, though, that you never do. You’re effectively stealing from your future self!

How are you navigating these more difficult financial times? Share your tips with members in the comments section below.

Helen Baker is a licensed Australian financial adviser and author of the new book, On Your Own Two Feet: The Essential Guide to Financial Independence for all Women (Ventura Press, $32.99). Helen is among the 1 per cent of financial planners who hold a master’s degree in the field. Proceeds from book sales are donated to charities supporting disadvantaged women and children. Find out more at www.onyourowntwofeet.com.au

Disclaimer: All content on YourLifeChoices website is of a general nature and has been prepared without taking into account your objectives, financial situation or needs. It has been prepared with due care but no guarantees are provided for the ongoing accuracy or relevance. Before making a decision based on this information, you should consider its appropriateness in regard to your own circumstances. You should seek professional advice from a financial planner, lawyer or tax agent in relation to any aspects that affect your financial and legal circumstances.

Written by Helen Baker

Leave a Reply

how will higher interest rates affect the pension?

Centrelink Q&A: Will higher interest affect your pension?

Checking old lottery tickets