How to ride out hard times ahead

The recent upward movement in interest rates should sound alarm bells for Australian consumers who are spending at record levels. It’s estimated each Australian has a personal debt of $20,000 – a $6,000 increase in just four years.

Low interest rates, a booming economy and a buoyant sharemarket are behind the spending splurge. On the sharemarket, the riskier IT stocks were on everyone’s “wish-list”. Margin lending has also been a big drawcard while interest rates are low.

Lifestyle items such as luxury or extra cars, boats, holiday homes, wine, travel and jewellery are usually the first things people acquire when the economy’s on the up. But they are often the hardest to give up when times get tough, especially when they also tend to lose their value the quickest.

We are now starting to see the upward movement of interest rates, and from here it can be assumed the economy will slow a little, and even the sharemarket may pause for breath.

If rising interest rates start to push people out of their ‘comfort zone’, to the point they feel overcommitted, then it is time to take stock.

Understanding your financial position is the key to riding out any financial hiccups, according to the Financial Planning Association. People should sit down and take a hard look at their circumstances. What is your loan to value ratio? That is, how much do you owe by comparison to what it’s worth? If you are hoping to consolidate the gains of recent years, it’s important to reduce how much you owe on those big-ticket items.

By taking a look at your position early enough, you may limit the need to get rid of assets quickly in the future and therefore not incur the heavy losses likely in a fire sale.

The next step is not to buy any more. In fact, returning to the time honoured virtue of living within your means is a good idea. Savings are at an all time low, and borrowing is at an all time high. Exposing yourself to uncalculated risk is foolhardy. You need to make time to do the calculations and determine the downside could be catastrophic. Take the luxury cabin cruiser at the marina. It will be almost impossible to sell in the event of an interest rate squeeze, and your loan repayments will have increased.

Now is also a good time to start paying off large chunks of the capital on your high or variable interest loans. You should give priority to reducing debt on those items, which do not produce income.

Financial Health Checklist

  • Assess your position
  • Stop buying lifestyle or trophy items
  • Budget to pay off large amounts of capital on items you’ve borrowed to buy
  • See a principal member of the Financial Planning Association

Margin lending has become a buzzword in the past couple of years.

The problem with margin lending, of course, is the possibility of unexpected and substantial falls in the value of the investments you have chosen. Be they share market or property investments, if their value drops, your lender may not wait for the price to go back up before making a margin call. You had better be in the position to cover the call or be prepared to sell down some assets to raise the margin.

If you do begin to feel uneasy about your risk/reward position, the best advice is to seek out a reputable professional financial planner. A licensed financial adviser can take an objective look at your situation and accurately advise you on the best course of action.

If analysis of your situation calls for a liquidation of some assets, the first to go, should be those that have other expenses in addition to your repayments. The registration, insurance and maintenance costs of a luxury car are well in excess of those of a non-luxury model. That boat with mooring fees is another example. If your tastes run to fine wines, then that case of Grange that was going to be a nest egg- will serve you better being sold to repay outstanding loans. Reducing your margin lending may be your last choice but you can at least, always exit your position quickly.

With a little forethought and some good advice from a financial planner, the option of having to liquidate the Grange for any other reason than your child’s 21st, should not be necessary.

If You Are Overcommitted

  • Get rid of the items that cost you to maintain
  • Sell off the luxury goods you can live without – use the money to repay loans
  • Reduce your margin borrowing
  • See a financial planner

This article was contributed by the Financial Planning Association of Australia, which runs a consumer hotline. It can be contacted on 1800 626 393 or go to the web site at