Australia is enjoying pleasing jobs figures and a strong economy as we move forward in 2022.

And while a strengthening economy is a good thing, it is expected that interest rates will start to rise, and that can be an issue for some borrowers.

Here’s what to know about carrying debt in a rising interest rate environment.  

Organise your finances now

Firstly, don’t panic! Even when interest rates do eventually rise, the increases will start small, so you can learn how to manage the higher rates.

Secondly, higher interest rates are not always bad! For anyone with savings, you will be better off with a higher rate on your cash balance.

And it’s also worth noting that everyone will be in the same boat as rates rise.

Money management tips for when interest rates start to rise

Buy, if you now want some specific tips to keep afloat during rate rises, then we have 6 cracking tips.

Here are 6 ways you can manage your money when interest rates do rise:

  1. Assess your current situation

It’s important that you know what state your current finances are in and check what rates you are paying for things right now )and what rate you have for any savings accounts).

Start with some simple sums to work out your current levels of debts and see if you can still afford it if rates go up.

2. Pay down your credit card debt by transferring your loan

Credit cards typically have high variable interest rates, so it’s a good idea to consider transferring your debt to a zero-rate balance transfer card that locks in a zero rate (typically for anything between 12-24 months).

Check for any balance transfer fee, but assuming this is low or doesn’t exist, you’re well on your way to better money management.

3. Negotiate a lower rate on your home loan or fix the rate now

Speak to your bank and negotiate a better interest rate for your mortgage.

If you are a long-term customer and have paid your instalments regularly, you should be able to ask for a lower rate. Even 0.5 of a per can make a difference and give you some breathing space.

Another option is to lock in fixed rates now - lock in the lowest fixed rate available to you as soon as possible.

4. Pay down as much as you can NOW

Money management tips for when interest rates start to rise

Look to see if you can pay off a larger chunk of the balance on your home loan or credit cards before the rate rises come into effect

If you can lower your balance before the new interest rate takes effect, you won’t feel the brunt of the rate so much.

You may have to cut back on spending in other areas to put more money toward your home loan or credit card balance, but you’ll save on interest in the long run.

5. Build up your cash reserves

If you can build up your cash savings, as interest rates rise, you’ll gradually earn more on the cash you have.

While rates are only going to rise slowly, any cash deposits you hold in the bank as interest rates rise could be a safe option that will generate some income.

6. Assess and diversify investments

Consider both short- and long-term investments.  

Long-term investments are good if you’re looking to invest for the next 10 to 20 years, and you can ride out interest rates waves.

But if you have a shorter-term “investment horizon” and are close to retiring, it makes sense to be more cautious and reduce your exposure to “riskier” assets such as shares.

Time to act

For help navigating the changing economic landscape, you can get in touch with our friendly team here.

Profacc Accountants can help you manage your business accounts as well as your personal wealth.