We develop good habits in bad times, and bad habits in good times.
Last week the Reserve Bank of Australia (RBA) increased interest rates by 0.25 per cent to 3.85 per cent.
It marked the 11th increase in 12 months and a total increase of 3.75 per cent in the same period.
When it comes to interest rates, perspective is important.
When investing, particularly in property, we need to take a long-term perspective.
Interest rates go up and down, and it’s totally out of your control.
On the flip side, interest rates go up when inflation is high and vice versa. When inflation is high, asset and rent values increase, too.
The reality is, if we hold an investment property for 10 years, in 6 to 8 of those 10 years we’ll be in a normal inflation environment (2 to 3 per cent) and pay an interest rate of between 4 per cent and 5 per cent on our mortgage.
For 1 to 2 of the 10 years, our interest rates will be high, and for another 1 to 2 of the 10 years our interest rates will be low.
When interest rates and inflation are low, like they have been, we have more cash flow and so develop bad spending habits. It’s human nature.
When interest rates and inflation are high, like they are today, we have less cash flow and start finding ways to spend less and earn more. Also human nature.
We can reduce our expenses by looking at eliminating some of our discretionary spending, and keeping tabs on where our money is actually being spent. My budget tool can help with that!
We can increase our incomes by increasing our rents, picking up another job, taking on extra shifts or working a little overtime. Some may even be in a position to earn a pay rise.
If you’re a property investor, you can lodge a tax variation, allowing your tax refund to be paid to you progressively out of your pay cheque rather than having to wait until the end of the year and lodging your tax returns. In other words, instead of getting a $10,000 tax refund at the end of the year, we can get $200 less tax withheld by our employer each week and paid into our bank account instead. (We did a great podcast on this recently!)
What’s most important is that these good habits we form when times are tough, and interest rates and inflation are high, stay with us in the times where inflation and interest rates are normal and low.
It is clear as day to me that there will be another surge in property prices when inflation subsides, and interest rates normalise. We have too many people migrating to Australia today, and not enough houses.
Those who form good habits over the next 3 to 6 months will thrive and prosper on the other side.
As my uncle John says, though, cash flow is the oxygen of investing, run out and it’s over very quickly for you.
As I have learned over my own property investing journey, habits are everything when it comes to whether we are successful or not.
What are your bad habits?
Might be worth looking at my habits workbook again and picking a bad habit to replace with a good habit over the next 30 days!
