There’s no doubt that 2021 has been a difficult year for many of us, but a prosperous 2022 is still within reach.
Chances are you finished 2021 with more savings, but also more trepidation. The past couple of years have been a roller-coaster for all of us – finances included.
Skyrocketing property prices have sent imminent home ownership out of the reach of so many. There’s increasing speculation that interest rates will rise sooner rather than later. The ASX has been volatile amidst investor fears throughout COVID, and many wonder if the current status is going to hold.
All of this uncertainty means that a prosperous 2022 should be a year of contingency planning, low-risk investment focusing on capital preservation and paying down debts.
Here’s a good ‘to do list’ for the new year.
1. Pay down high interest debts
Although it seems like a boring use of money, paying down high interest debts such as credit and store cards should be a number one priority.
Rates are so high that making only the minimum payment each month is like throwing money down the drain. Do what you can to increase you payments to take bigger chunks out of the debt. Get rid of it and commit to not using your cards in future.
2. Plan for emergencies
Try and start saving something each week or month to build up that buffer fund. An emergency fund is critical to help you through any sticky patches where hours may be cut back or business dries up.
3. Preserve your capital
With interest rates on savings accounts abysmally low, after-tax returns from savings accounts could easily be negative if you don’t move your money into one of the top paying accounts.
The best rates tend to be on instant access, internet-only accounts. It may be worth splitting your savings between the security of a fixed interest rate in a term deposit, and a variable, but higher rate in an instant access savings account.
Look at websites such as RateCity to find the best deals – it may be that you can take a variable rate and still have room to absorb a couple of rate cuts instead of taking a lower rate on a term deposit. Do your homework.
There are still good opportunities to refinance your home loan before interest rates rise. A borrower with a $400,000 home loan only needs to achieve a 0.40 per cent saving on their rate (even taking account of a possible $1,000 of switching expenses) to be ahead and saving money after just one year. There a numerous deals offering savings of much more than this compared to lenders’ Standard Variable Rates.
The only reason to be paying over the top is apathy. And with almost everybody free from exit fees nowadays, the only expenses you need to worry about, as long as your LVR is below 80 per cent of the property value, are valuation fees and a couple of other legal fees – but some lenders even cover these costs for you.
The message is simple – switch to a better deal while you can.
For those with higher LVR loans, the situation is more complicated because of the need for Lenders’ Mortgage Insurance, which can add thousands to your switching costs. Speak to a broker to see if switching makes sense in your circumstance.
The best deals on the market are from mutuals such as credit unions and building societies. That said, ‘prime’ borrowers with big mortgages and lots of equity will often be given preferential ‘secret’ deals by the banks. So if you fall into this category, see what one of the big four will offer you – word among brokers is that they will offer very generous rates for good customers.
5. Don’t panic
Although there are many gloomy predictions out there about the coming year, panicking won’t make things any better.
If you’re young, don’t worry too much about your superannuation – there is plenty of time for it to grow and recover over the coming years.
If you’re older and approaching retirement, ask your financial adviser about the wisdom of taking some money out to hold in cash. Although the wisdom is selling out of the market at this point is questionable: it may well mean crystallising losses or incurring an unnecessary tax bill, so be as patient as you can.
Take steps right now to ensure you have a prosperous 2022. The peace of mind it will bring will ensure it’s a happy new year.