Money guru David Koch reveals weapons for battling low inflation

LOW inflation is here to stay and the ripple effect can wreck your investment expectations. Here’s what this means for you.

LOW inflation is here to stay and it can wreck your investment expectations. Get used to it because we are all going to be forced to adjust.

It means reassessing everything. From how long it will take to save for a home deposit to what you’ll need to contribute for retirement.

We used to assume a 10 per cent annual return on investments … mainly because of high inflation and it was easy to do the maths. Now we’ll have to get used to less than half that. And there will be no more big pay rises to help the family budget.

The ripple effect of low inflation on your finances is huge.

When prices are falling, consumers and businesses have less incentive to spend or invest, as they expect things will be cheaper in the future.

As a result, the economy can get locked into an ongoing cycle of low growth and low wage growth. As Tim Harcourt, J.W. Fellow in Economics at the University of New South Wales, explains “when prices are falling you don’t have the same pressure on wages anymore, resulting in pretty stagnant wage growth [in Australia]”.

Here’s what this brave new world of low inflation means for you.

The ripple effect of low inflation on your finances is huge.

Household budget

The prices of goods and services are broadly stable or falling, which is good news for the family budget.

The flip side of this is wage growth is also slow, meaning forming good financial habits are more important than ever in order to get ahead.

Sit down with your partner and put together a plan to take control of your spending, try to divert any additional money into savings or investments and set up a rainy day fund to cover unexpected expenses.

Savings and income rates will stay low

To combat low inflation and drive growth, the RBA has slashed the official cash rate to a record low of 1.75 per cent with many experts expecting further cuts may follow.

A low cash rate means returns offered by savings accounts and term deposits are also at record lows, so you’ll need to look elsewhere if you’re searching for higher income returns... and take on more risk.

The prices of goods and services are broadly stable or falling, which is good news for the family budget.

Shares and managed funds are one way investors can reap higher rewards. According to Ben Nash, Director and Financial Planner at Pivot Wealth, “when interest rates are this low, business can get a real boost on the back of cheap investment loans”.

“The impact is that buying shares or share type investments such as managed funds can provide higher returns when interest rates are low, because as an investor you benefit from part ownership of the company and the higher return they can make on their business,” he says.

Good strong dividend paying companies can be gold during low inflation. But get good advice if you’re looking at shares. In consumer and services industries low inflation means stagnant prices, narrower margins and pressure on profits.

Sit down with your partner and put together a plan to take control of your spending.

Property changing

Low interest rates also mean it’s never been cheaper to borrow money to invest in property; over the last few years this has been one of the key factors pushing up prices in our capital cities.

And while the extreme growth we’ve seen in places like Sydney and Melbourne is tipped to slow, “it does seem likely that in the current low rate environment property prices will remain supported, at least in part, by lower interest rates,” says Nash.

But just because you can borrow, doesn’t mean you should. Prices won’t increase forever and interest rates won’t always be this low, so be careful and make sure your investment stacks up long-term.

If you already have a home loan and the variable interest rate is falling, it’s a good idea to try to keep making higher repayments. After all, it makes sense to pay off as much of the loan as possible while it’s cheap to do so.

Be selective in any property investments. With a flood of new construction coming on stream, capital growth will be subdued and rents will be under pressure as more properties chase fewer tenants.