A lot of things are going on in the global economy at present. Inflation. Interest rates. Supply chain interruption. War. Recovery from all the other crises that have characterised the decade. Everyone is talking incessantly about recession, recession, recession. In this week’s article I will break down some of the things that are going on, what they mean for you on your wealth journey, and steps you can take to cope over the next 6-18 months.
Let’s start off with interest rates at the moment. So, interest rates are a fiscal mechanism to control inflation, because if we make the cost of borrowing money more expensive, the theory is that we slow down people spending. If we slow down people’s spending, then we have to adjust how much supply that we created. If we don’t create the supply, then we don’t have what is necessary to fill the demand.
The bottom line you have to understand here is that in the UK, the Bank of England controls our interest rates. There will be a body in every country that controls the interest rates of that country. Now, what we’ve been seeing in 2022 is interest rates climbing gradually; that would be perfectly normal, but they then started to exponentially rise. And that exponential rise is a result of nerves in general banking, but it’s also nervousness about the predictions of what’s going to come.
While on the one hand, people will be predicting future inflation rates and future production – because production in the country is important; what we can produce, what we can sell, how we can transact, and imports and exports is really important – while they’re predicting all of that going forward, the forecasts have been getting gradually more pessimistic for all the reasons I mentioned before.
In this context, interest rates start to climb more steeply. So, then at the end of September we saw the Bank of England announce another increase in the base rate. What you probably now want to know is what that has got to do with you. So first off, it will influence any form of new borrowing that you want to take – so, on a personal level, you might think twice about buying your new car now, or about buying a new house, or about moving to bigger premises if you have a business.
But why I keep banging on at you to pay attention to your financial position – your sense of financial control – is because I was very aware of the changes that were happening and the potential impact these changes might have on everyone. If we go back through my previous articles and podcast episodes, I can prove to you that I have been telling you to pay attention to your mortgages, annual loans, and everything else for months. The point is that if you did nothing about it, you are now going to be in a position where because of all the drama in the news, you’re suddenly aware of it. And now you are leaping, maybe with everybody else, to try and re-mortgage. And this could be your property portfolio or it could be your personal mortgage.
If you haven’t acted, and it’s too late for you to act now to shore up your investments, what you’ve got to do is look at how you can mitigate the risk of the interest rate rises and the increased utility costs that are coming down the line. And there are simple things you can take control of that I’ve spoken about before.
Understand where your liability is and how much you owe. What is the term on your mortgage, how will recent changes affect your rate? To mitigate utility costs; have you explored opportunities? Have you looked at solar panels, for example? Have you looked at insulation for your property? It is important to note that this applies whether it’s your own home, whether it’s your investment property, or even whether you are renting; you could be speaking to your landlord about opportunities to improve the insulation in the property and hold back utility bills.
After your debts and your utilities are squared away, what you need to be looking at is how you live your life – your daily habits of consumption. I don’t want to harp on and on about this, but have you got a spreadsheet? Do you know your monthly expenses? Are there certain luxuries that at the moment you could scale back?
This might mean that instead of three takeaways a month, plan to have just one. Buying coffee on the way to work? Invest in a flask and take your coffee with you. I’m not saying that you have to tighten your belt too much. You don’t have to scrimp and save on everything. This is all about living a wealthy life, but part of living a wealthy life is being clear about what that means to you and being in control. If eating fewer takeaways or having date nights on the sofa for a few months means you keep your budget on track and you don’t have to make dramatic cuts down the line, I believe that will be worth it to you.
The bottom line is that these changes probably already have, and certainly will continue to affect us all over the short to medium term, but that does not mean we need to panic. We know where these phenomena are coming from, we know the tools we need to manage uncertainty, and if ever you need a hand or an expert perspective, you know where to find me.
I hope that I’ve been able to share some calm on troubled waters. If you are interested in learning more about creating a wealth plan, make sure you listen to my podcast A Wealthy Life, and look at the free resources I offer like the Readiness to Retire Wealthy Audit. Keep calm and carry on budgeting and searching for silver linings in every circumstance. For more impactful wealthy life tips, please visit my website www.vickiwusche.com, listen to my podcast here and here, or schedule a free call with me.