Just as there are financial strategies you can adopt in a high interest economy, there are also measures you can put in place to ensure that you are managing your money responsibly in a low interest economy.

It’s no secret that interest rates are the lowest they have been in decades. While this creates an excellent opportunity for homebuyers, what’s the best way to manage your money in this environment?

“In a low interest rate environment, you really need to be proactive and review your current investment strategy,” explains Michael Rose, Elston Strategy Adviser.

“If you have all your capital in cash in the current interest rate environment, the real return you are earning is negligible or even negative, by the time inflation is taken into account. Assuming there is no short-term need for cash, it may be better to diversify some of your capital into different asset classes.”

What level of risk are you comfortable with?

From the outset, it is important to understand your income needs and the level of investment risk you are comfortable with. Given the low interest rate environment, you may like to consider diversifying some of your capital into growth style assets (shares and property).

Growth style assets should provide a growing income stream over time, which will help to combat the effects of inflation and maintain the purchasing power of capital.

It’s not uncommon for some investors to misread the market, which can prove costly.

“In the current low interest economy, I often see people jumping into high yielding investments without fully understanding the risk, which is the trade-off with these kinds of investment,” explained Mr Rose.

“You really need to understand the mechanics of the investment and any potential pitfalls that may exist, before making a considered investment decision. For this reason, it is important to seek professional financial advice to help identify these risks and find the appropriate financial solution for you and your individual circumstances. What suits one person may not be right for the next.”

When will interest rates rise?

This is the million dollar question! The short answer is that no-one really knows. While it is likely that the Reserve Bank of Australia will keep interest rates low for a while yet, and may even make a further cut, it is by no means a sure thing.

So if you feel that an interest rate rise may adversely affect your monthly budget, you may like to consider fixing part of your home loan.

And remember, it’s also wise to build in a buffer, to make sure you’re not stretched if interest rates do rise in the near future.

How to take years off your home loan

Now’s the perfect time to make a substantial dent in your home loan, simply by paying more than the minimum repayment.

On top of this, if you pay fortnightly instead of monthly, you’ll make a few extra payments each year without even noticing. This simple strategy could take years off your loan – and give you some room to breathe when rates rise again – because yes, they will definitely rise again.

For example, an extra $300 each month on a 25 year, 4.5% interest loan of $300,000 would save you $55,000 in interest, and see your mortgage paid off almost seven years sooner!* This is a substantial gain with very little pain, if any at all.

Need help managing your money?

If you’d like to arrange an obligation-free meeting with one of our financial planning experts to have a chat about managing your money, and in turn passing these good habits down to your children, please contact us on 1300 ELSTON or email info@elston.com.au.

*This information is provided by the Macquarie Virtual Adviser Network (VAN). VAN’s services are provided by Macquarie Bank Limited ABN 46 008 583 542 AFSL 237502, a member of the Macquarie Group.