DUE to the ongoing war between Russia and Ukraine, as well as burgeoning oil prices, the entire world has been experiencing periods of high inflation (increase in prices of goods and services). Central Banks of various countries, including ours, have been doing what they can to lower the inflation rate by increasing key interest rates. With those in mind, we shall first discuss how increasing interest rates affect us, and what we can do during these difficult times.
In the investing world, the US is still considered the safest form of government security. It is after all, a risk-free investment, for a government almost never defaults on its loan obligations. When the US Federal Reserve decides to increase its key interest rate, consumer spending ought to slow down because more people will keep their money in the bank rather than spend it.
There will be a greater incentive to keep money in a time deposit or in short-term treasury bills and less appetite for riskier investments that include stocks both in the US and abroad, cryptocurrencies and others. Prices of these riskier assets would then fall due to lesser demand.
In addition, when interest rates of banks rise, borrowing becomes more expensive for both consumers and companies. The latter, planning to launch their initial public offering (IPO), may get lower than expected demand—therefore, lower IPO price and less capital proceeds—because people will be more cautious in investing. Furthermore, expansion plans may be put on hold or delayed because consumer demand would decrease.
On the side of the consumer, buying a house or a car using a bank loan might be postponed because of higher loan rates and uncertainty. Even if consumers had the cash to spare, it would be prudent for them to keep their assets liquid (easy to convert to cash), rather than risk it being stuck in a property that is hard to sell during an unexpected emergency.
The abovementioned scenarios show what could happen in a period of high inflation and increasing interest rates. What then should we do in response to this type of environment? Let me enumerate my suggestions below:
1. Hold back on big-ticket purchases. If you are considering borrowing to buy a car or taking out a loan to buy land, you may want to postpone it and keep more cash in your portfolio.
2. Be efficient in travel. Since fuel is pretty expensive nowadays, you should plan your daily route. Drive your vehicle, preferably at night, without air conditioning and with minimal baggage load. Go to the farthest location first, then on to the next, until you finally go back to your home base.
3. Since electricity is going up, try to cut back usage of high-wattage appliances (i.e. freezers and chillers), shift to natural cool air rather than AC. Turn off your water dispenser cooler and heater. Use a thermos instead and a water container for chilling. Use energy efficient LED lightings.
4. When doing groceries, follow a strict checklist and budget. Avoid spending on new unnecessary food products. If you are looking for essentials, look for the products that are nearing their expiry date. Those products are usually sold at a substantial discount.
5. Cut back on recurring expenses. If you don’t need a gym membership, country club membership, postpaid plan or Spotify monthly subscription, then you can save a lot of money.
6. Pay off debts. The fastest way you can save money and increase your net worth is to eliminate all debts since these carry a hefty interest, plus penalties should you pay late. Interest rates for borrowing money are often higher as compared to lending it.
7. When you have exhausted all your expense reduction options, find ways to increase your income. Cutting down expenses does help in the short-term; and it is a good virtue to be thrifty. However, even if you remain frugal, inflation will inevitably make your wants and needs higher year by year. Hence, you should build your additional income streams as well. Aside from your full-time work, get a sideline work such as sales. You can also invest in rental properties in order to earn passive income (or income derived outside of active work).
For more financial advice, do follow my FB Page at OhMyFinancePH. I will be launching soon my very own financial awareness course for Filipinos.
“Do not be anxious about anything, but in everything by prayer and supplication with thanksgiving let your requests be made known to God.” Philippians 4:6 ESV
Raymond Anthony Quisumbing is a registered financial planner of RFP Philippines. To learn more about investment planning, attend the 97th batch of RFP program this August 2022. To register, e-mail info@rfp.ph or text at 0917-6248110.