Five things to do to manage interest rate hikes

Many countries across the world have also been hiking rates to manage rising prices. South Africa is the most recent African country to hike rates. Others have included Ghana and Nigeria. And more hikes are expected in the coming weeks.

From a personal finance perspective, increased interest rates have implications for anyone with a mortgage, vehicle financing, student loan or any other form of debt.

Many households are feeling the financial pinch caused by the rising cost of living. Low-income households are the most vulnerable to high food costs. But middle-income earners don’t fare any better. A recent report on South Africa by the consultancy PwC highlighted that 40% of this cohort’s expenditure is allocated to food and 20% goes towards housing and utilities.

Before the economic situation goes from bad to worse, the impact of rising prices – and rising interest rates – can be mitigated in a combination of ways. Here are five steps you should consider taking.

Here’re the five things you can do:

Repay Debt

Try to pay off as much of your debt as possible. As interest rates rise, so do debt repayments. Loans could be tying up funds that could better service another area of your finances.

Another important consideration is that the risk of defaulting on your debt repayments increases during financially difficult times.

If default occurs, it would spell bad news for your credit rating, which would jeopardise the ability to take out a loan in the future.

Shop around for the best rate

Investing in the property market is a lifelong goal for many. New entrants in the housing market should resist the temptation to accept the first mortgage offer that comes their way.

Many banks are not explicit in sharing this information but your “home bank” should give you the best offer because they want to keep all your business in house.

Banks are in competition with one another to be your home loan provider and the better offer is, more often than not, the one that’s below prime.

Track your finances

Many may think of budgeting as the equivalent of wearing a financial straitjacket. But tracking your finances provides another way for finding opportunities to cut expenses and increase savings. Consider the opportunity cost of not budgeting.

Without monitoring your cashflow, it becomes nearly impossible to make contingencies for unplanned expenses.

Clearly demarcating how much you will put away in savings can make a huge difference in the long run.

Many households are more financially vulnerable than they think. In fact, most families are one medical emergency away from being financially devastated.

Just think of the doctor’s consultation fees (or worse, specialist referral fees), ambulance call-out fees and out-of-pocket expenditure.

With or without medical aid, making provisions for the unforeseen occurs through budgeting.

Negotiate insurance premiums

Another unspoken financial hack that could save a little is negotiating the increase in your annual insurance premiums.

If you haven’t claimed from your insurer within the financial year, you can turn this to your favour in stalling the premium increase.

And if you have many assets covered by the same insurer (for example, vehicle and household contents), then this too can work for you. While it may not make a world of a difference, as the expression goes, “a single grain of rice can tip the scale”.

Think savings-plus

Opportunities exist to generate a second income stream from financial markets despite poor investor sentiment.

Investments in interest-earning securities can be a useful method of generating passive income from idle cash.

Interest-earning securities provide income based on market-related fixed interest rates throughout the investment period until the investment period comes to an end, while also guaranteeing that the capital amount invested is protected.

Source: The Conversation