đź’°What This Rate Rise Actually Means For Your Finances And How It’ll Stop You From Spending!

Inflation is too hot right now. You know it, I know it, we all know it! And it’s affecting us all. Whether you’re in the UK enjoying inflation that’s dangerously close to 11% or if you’re lucky enough to be cruising along with 8.6% inflation in the US, we’re all feeling the pinch. Though if you’re one of my Chinese readers, then you’re even luckier as you guys haven’t even hit double-digit inflation. I’ve got inflation envy right now.

Anyway, wherever in the world you may be, chances are that inflation is taking a big bite outa your finances. You’ll also have noticed that governments have kinda realised that inflation isn’t exactly transitory (took them long enough!) and that it’s becoming more and more entrenched into our system. Inflation’s a bit like squeezing toothpaste out. Super easy for it squirt out, but near to impossible to get it back in. Neatly, anyway!

Our central bankers have two choices: they can let inflation rip, eroding their debt and our living standards all at once or they can (try) tame inflation by way of raising interest rates – one of the tools in their toolbox to deal with this kind of thing. The other tool they could technically use is higher taxes – which will mean that we’ll have less money to spend on extras, thereby cooling the economy through lowering our spending through that nasty channel. But governments will be crucified if they do the latter so they’re going for interest rate hikes! Plus with elections round the bend the last thing anyone wants is to be caught in a high-inflation-high-tax regime.

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Rates are rising and so is the cost of money

When banks raise interest rates what they’re effectively doing is pushing up the cost of money. Up until now, the cost of money was practically zilch. We, the consumers, were able to spend, spend, spend be it on our houses (with rock-bottom mortgage rates) or on our cars with nice ‘n cheap financing. It was cheap to borrow money. Period. And businesses? Same story! They were able to take on debt to grow their biz with piddly levels of interest. And investors were happy to pile in since the alternatives weren’t able to compete.

But now we’re facing something rather different. Central banks have started raising rates; in the UK rates have gone up from 0.1% to 1.25% in a matter of months. And while it’s still lagging way behind inflation, rates have gone up more than ten times. This means that our mortgage rates are going up and for those of you whose fixed mortgage is slowly coming to an end, you’re in for a nasty shock. But it’s not just mortgages that have gone up. It’s car loans, too. During covid, you could snap up a car with cheap financing rates. Now, such things are much harder to come by. 

Though not all cars are created equal. Mazda – a Japanese car is still able to offer low interest rates on its financing option of ~2.5-2.7% since Japan has low inflation. But cars like Porsche are racking up their rates to well over 7% since Germany’s inflation is sticky and way more problematic. So if you find your interest rates going up by more than you can handle and are really feeling the pinch, you could look into alternative car makes that have lower interest rates which will mean they’re made in countries with equally low(ish) inflation.

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But it’s anything that’s bought on finance, really that you’ll find has gone up. A friend of mine bought a watch during covid right in the thick of it in April 2020. They didn’t pay for their timepiece upfront instead, they took out a finance option. Except this one came with 0% interest rate! It just shows how desperate those guys were to sell their wares. After all, no one really knew what was going to happen. We kinda thought all was coming to an end. Now he’s laughing to the bank because not only have interest rates gone up but so has inflation which means that his debt his going down as we speak. I bet the same model he got his hands on now costs way more as well. What a time! 

Lower spending = lower inflation. It’s a win-win!

So, your mortgage rates are going up, your car is becoming more expensive to finance and you’re finding yourself with less money in your pocket each month. There’s only so much in the tin and if our monthly expenses are going up with every passing day, there ain’t gonna be much left to splurge on extras.

Because that’s exactly how they want it to be! When all these expenses go up, we have less disposable income to splash out on the economy; on shopping, holidays (though even this ain’t stopping no one!), dining out and so on. This means that consumption falls which is ~70% of GDP and in turn this slows a very overheating economy.

Interest rate hikes are designed to turn down the heat. To urge us to spend less and save more (if we can) because our economy can’t cope. We’re the ones that have to slow the economy down because central bankers can’t quite affect the supply side of the equation much as they’d like to think (which btw is in total tatters) so they’re trying to calm the demand side of things. The downside: this slump in demand = recession. Though read here why recessions aren’t so scary and what you can do to prepare for them.

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A slowdown is coming – be prepared!

While we enter into this period of monetary tightening, it can feel daunting. Many of us won’t even remember a time when inflation was high let alone interest rates. Now it’s all around us. These are strange times but you’ve gotta be ahead of the curve and do what you can do avoid feeling the pinch. Or at least reduce the pain! 

You’ve gotta keep asking yourself whether you really need all those expenses you have or whether you can make do without. Do you need that car? Or shall I say, do you need that specific make with the higher interest? Or can you make do with one of those Japanese cars? Are you able to lock in a 10-year mortgage rate before rates rise further? And can you find other ways earning money? 

These are strange times we’re living in and the best thing you can do for your finances and for your general sanity is to be prepared. To cut down on unnecessary stuff and save and invest as much as you can.

Good luck out there!

Disclaimer: This blog is not investment or financial advice. It is my opinion only. This blog is not a personal recommendation to buy/sell any security, or to adopt any such investment strategy. Always do your own research before you commit to any investment