Believe it or not, it’s been nearly a quarter of a century since the Reserve Bank Cash Rate peaked at 17%. Such a massive rate was a bain to those with a mortgage, but was a boon to those relying on investments for income.
Times have changed. The rate now stands at 2.5% and it’s been 4 years since we had a rise. While this scenario limits the attraction of bank deposits and fixed interest investments, it does create other opportunities for your personal financial planning.
The merits of increasing or paying down debt
For those in the accumulation phase of their financial plan, it may seem like an attractive prospect to take advantage of low rates and increase borrowings, particularly for investment in property. While there may be some merit in this approach for some people, it is vital to consider whether you can maintain a heavier borrowing load if and when rates do rise back to normal levels.
It is also important to consider the opportunity cost of increased borrowing, rather than directing those dollars toward a more diversified range of asset classes.
The right choice for you will depend on your personal preferences, comfort level for investment risk and the lifestyle objectives you are aiming to achieve.
The same holistic assessment is necessary for those who are considering the benefits of accelerating debt repayment while rates are low.
Alternatives to fixed interest
Low interest rates also impact the effectiveness of fixed interest and cash investments for those who are looking to generate investment income. While these investments will always have their place as a means of balancing risks and lowering volatility in a portfolio, they are not the only way to achieve income from investments.
Consider that it is possible to use share based investments as a means of generating dividend income with the added bonus of imputation credits that may accompany those dividends. Shares also have the potential for investment growth over the long term. To make the most out of your investment opportunities, it is a matter of getting a sound analysis of your personal situation and tailoring an investment strategy to suit you.