It’s not uncommon to hear terms like ‘interest rates are rising’ or ‘the RBA has announced an interest rate rise’ thrown around in the media.
If you’re unsure what those phrases mean, you’re not alone.
In simple terms, interest is a percentage your bank or financial institution charges for their services of lending you money. The interest rate is the percentage figure (e.g. 2.5 per cent). It differs between providers and fluctuates in response to the economy.
Growing interest rates are not always bad, interest can also be positive.
Basically, the person who owns the money will get the benefits. So if you have borrowed money, the bank owns that money and will reap the benefits of growing interest rates while you pay more for the privilege of having access to those funds. But if you have savings in the bank, you get to reap the benefits and will earn interest on those funds and your money will grow.
In 2023, we’ve seen a steady interest rate increase, which means the percentage added on top of a loan is continuing to grow. That essentially means that either you are earning more on your savings OR you are paying more now for your loan than you might have been four years ago.
But why are interest rates rising, and what does this mean for you? Read on to find out more!
Why are interest rates rising?
There are a few things that can influence the rise of interest rates. These include an increased demand for money or credit, inflation or simply Government policies or programs. Currently, inflation is a significant contributor to the growing rates in Australia (as of June 2023 inflation, i.e. the rising cost of household goods and services, was 7 per cent).
Every month on the first Tuesday, representatives from the Reserve Bank of Australia (RBA) meet to discuss whether shifts are needed to the current rates. Since April 2022, there has been a consistent interest rate rise almost every month which has resulted in Australia’s highest cash rate since April 2012.
However, the RBA doesn’t increase the rates to simply make more money. They increase the rates in hopes it will help curb inflation.
How do the rising interest rates affect me?
Depending on your financial situation, the rising interest rates may have a positive or negative outcome for you.
If you have borrowed money from the bank for a loan such as a home, car, personal or holiday loan, the amount of interest you’re paying on top of this loan will increase with the rising rate. This means your repayments each week, month or quarter (however often you pay them) will increase.
Higher interest rates also reduce the borrowing capacity for investors and potential home buyers. This can slow down demand in the property market as fewer people have the deposits available to make a purchase and pay off regular mortgage payments.
If you’re a business owner, you may have to factor in increasing costs and raise the prices of your products or services or look at other actions to improve cashflow.
One positive outcome from rising interest rates is the increased interest on your bank account. If you have a savings account, or an account you don’t touch, your monthly interest will increase as the interest rates do. This means you’ll receive more money in your bank account each month as a percentage of the saved figure.
What small steps should I be using to manage rising interest rates?
- For the average person, interest rate rises might be impacting your grocery, petrol, mortgage and other bills. The best way to prepare for increased interest rates and inflation is to create and manage a budget, or as we like to call it, a ‘Spending Plan’.
Whether you’re a homeowner, business owner, a renter or living at home, you should have a spending plan to manage your cash flow and tackle the rising cost of living. We highly recommend using a budget planner so you can adjust as needed when interest rates change. Our digital courses offer a great Spending Plan Calculator as well as provide you with additional resources to understand and take control of your finances. We understand that making these adjustments can be stressful, so we have done the hard work for you in our customised calculator that will help you navigate changes to your spending without having to think too hard about money.
2. Review your savings accounts. Check out the interest rate that your bank is offering you right now. Make sure that the rates have gone up recently and that what you are receiving is competitive with other accounts available to you. Sometimes you won’t even need to switch banks. Sometimes it’s just the product type that you need to adjust.
3. Review the interest rates affecting any debt that you have – mortgages, personal loans, car loans or credit cards. It is worth shopping around right now for the best deal. But remember to consider any switching fees or penalties that might mitigate any savings that you could make in the interest rate alone. Read the fine print and be cunning. You could literally save thousands if you spend the time.
Take control of your money by improving your financial literacy
If you want to feel more empowered to manage your money for the best outcome for your financial well-being, take a look at our digital courses or consider joining our exclusive Tiny Fox community where you will receive monthly advice and access to tools and calculators that help you stay on track.
We give you small actions you can take every day to improve your financial situation with confidence.