Cost of living in Australia is hard to ignore when you feel it every day. The cost of everything is increasing. Housing, petrol, food, and clothes. It’s becoming a daily battle of not spending and prioritizing expenses as household budgets are being blown to smithereens. The inflation rate is 6.1 percent – a 21 year high, so what can we do about it? And how do we prepare for the ongoing cost of living pain?
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Summary Points:
- Cost of living pressures is hurting family budgets due to increased inflation.
- Interest rates are rising to fight inflation – but it could result in mortgage stress, job losses and a recession.
- Cost of living pressures can be reduced by building a cash buffer, removing unnecessary lifestyle expenses, and reducing any living costs if possible (such as mortgage/rent/bills).
- Be aware and prepare for cost of living pain to continue – such as 7% interest rates, increases in fuel, energy and living costs – and make sure you are in a position to manage the increases.
- Be prepared to lose your job in a tightening economy – update your resume and start networking now.
- Moving to a cheaper state could be an option to halve your mortgage and reduce the cost of living expenses
What is the Cost of Living?
The cost of living is the amount of money required to cover basic everyday living expenses, such as food, fuel, housing and utilities. Basically, it’s the money you must spend to live.
These expenses can be minimised, such as spending less on groceries and clothes. But some expenses, such as mortgages and rents, will continue to increase and must be paid.
Why is the Cost of Living Increasing?
The cost of living continues to increase as external inputs to produce anything, such as fuel, energy, labor, and shipping costs increase. These extra costs are passed onto the consumer, impacting the price of everyday items.
For example. In Australia, some fruit and vegetables like carrots and tomatoes have gone up 40 percent. Bread, beef sausages, and baked beans have jumped 20-30 percent. The cost to produce these items has increased, therefore the price to buy these items has also increased.
A big part of these increases has been the jump in power prices (150%) and the cost of fuel which also jumped 141% in the year. Fuel is also set to increase another 22 cents on September 29 as the halving of fuel excise is set to expire. Further increasing the cost of living.
Unfortunately, we have not hit the peak of financial hardship. Energy bills and mortgage interest rates are set to continue to increase. Inflationary pressures will see businesses hit the wall, job losses will increase and the idea of getting ahead will be replaced with the reality of trying to stay afloat.
What Is the Impact of Rising Cost of Living
The increasing cost of living pressure can result in further inflation, job losses, recession, and an impact on mental health.
Inflation pushes up the cost of living. If inflation continues to increase, the Reserve Bank lifts interest rates to reduce inflation. If the interest rates continue to climb, it can lead to mortgage stress for some, and ultimately it can lead to a recession. A recession will trigger business closure, bankruptcies, and job losses. This scenario is seen as a “soft landing for our economy. But the soft landing will still hurt.
Before it all hits the fan, the best approach is to prepare now to try to reduce some of that impact.
What Can I Do About Cost of Living Pressures?
The only thing you can do is spend less money, build a cash buffer and prepare for the worst.
Using Apps like WeMoney can help you understand your spending, and it can also provide ways to save with budgeting features and special deals to save money on loans, credit cards, and other utilities.
The way to minimize cost of living pressures is to turn down the living & lifestyle dial. And maximizing any savings can help build a cash buffer to manage further increases.
Here are six ways to prepare for the ongoing cost of living crisis.
How to Spend Spend Less and Build a Cash Buffer
Living expenses can be reduced, such as refinancing loans or finding cheaper energy companies. This can help alleviate some pain, as can shopping smarter. Stop buying unnecessary items, try to buy items on sale, and drive less to save on fuel.
These expenses will continue to climb as inflation continues. Being conscious of these expenses and actively finding better deals can help reduce their impact. Unfortunately, these expenses can only be minimized and generally can’t be avoided.
Lifestyle expenses are usually the first to go when the cost of living starts to bite. But they are also the easiest area to save in. Streaming services, eating out at restaurants, excess lifestyle spending at play centres, summer holidays, and even Christmas presents can easily be toned down or turned off.
This also brings an opportunity to reset and re-focus your lifestyle spending. Does every activity require spending money? Prioritizing events, and not attending every party and activity will be beneficial to your wallet. And maybe being a little bit “old skool” by going to parks and taking part in activities that don’t require any cash, could also be beneficial.
Recalibrate Your Savings Mindset
Spending less and building that cash buffer could help save and recalibrate your finances for the better. A renewed focus on “how much can I save” rather than “how much can I spend” is healthy for your pocket and for your overall consumerist mindset. And a hefty cash buffer can help weather the worst-case scenarios in an economy that is slowly going down the toilet.
How to Prepare for 7% Interest Rates
The official RBA cash rate is currently 1.85%, which means a standard loan rate could be 4.39%. A 500K loan will require $2500 a month in repayments. However, the market predicts that the RBA cash rate will hit 3.7% by May 2023. That means a 500K mortgage will hit a 7.05% interest rate, making that 500K mortgage require an extra $843 a month (paying $3343 in repayments).
With the median house price in Australia’s combined capital cities at $928,812, this could see a jump from under $5000 a month to 6500 in repayments. A difference of 1500 dollars. Along with that increase, all of the other expenses that will continue to cost more. How many people can absorb an extra $1-2000 on living expenses?
It’s essential to know that interest rates can go to 7% or higher. And it’s also important to know if your current finances can handle that. Prepare now! Look at your current income, living expenses, and lifestyle expenses now. Map out all your expenses alongside a 7% interest rate. Could you survive? What if you factor in other costs increasing?
If your worst-case scenario is that there is no way you could service that debt, you have time to do something about it now. And if your finances are in order and you can manage that increase, it is still worth focusing on saving as much as possible for further worst-case scenarios.
How to Prepare for a Job Loss
Australia’s unemployment rate is at its lowest rate (3.5%) in 50 years. This is a good sign that the economy is in good shape, right? That probably depends on what sector you work in. As interest rates increase, the cost of debt increases, and businesses look to save money. The easiest way to find efficiencies and save money is by reducing the workforce.
Unfortunately, this is how a business operates. Having lost my job three times in 2 years, I know it can be hell. It is important to prepare for a potential job loss now. Update your resume and LinkedIn profile, start networking and keep your options open. Have a chat with a recruiter to get a feel for the current job market in your industry.
There is no harm in preparing for job loss and having your feelers out. The worst case is you lose your job, but if you are prepared you can minimize the impact and reduce the time required to find another one quickly. Or potentially, you may find a new, better-paying job right now. That extra money can help with any cost of living pain.
Be Prepared to Make Extra Money
There are so many ways to make money from home these days. From renting spaces to selling your old stuff. Even picking up casual weekend work or driving an Uber is possible. These “side hustles” are great If you need a few extra hundred dollars to help ease the cost of living pressure.
The only drawback is if you already work full-time and have a family, it can be draining. But sometimes, if there is a cost, and you are trading time for money, you just need to pay it. More time to relax and enjoy your family is important. But ensuring that you can survive any potential disaster and having financial peace of mind is worth it.
Be Prepared to Move if Needed
Australia is a big country but most Australians don’t move around a lot. The most populated states are also generally the most expensive when it comes to living and lifestyle. For example, Sydney has the highest median house prices in Australia, (over a million dollars) while Darwin has the cheapest (506K). Beautiful states like Perth have a Median price of 560K.
You can also take electricity prices into account. Where South Australia has the most expensive electricity prices (43.67/kwh) while the ACT has the cheapest (21.76/kwh). Is it worth taking the cost of electricity into account when deciding whether your current state is worth staying in?
Then you can look at the average cost of groceries. Tasmania has the highest average weekly grocery bill ($160) compared to Western Australia which has the lowest ($143).
Moving across to the other side of the country may not be possible for most, but it’s worth keeping an open mind. Especially where remote working from home has become normalized. And video meetings are an everyday occurrence for all businesses in the post-covid world.
Imagine cutting your mortgage in half and living on less than you do now…
Final Thoughts
The cost of living pressures are already hurting millions of Australians. The key to getting by is to spend less, save more, and be prepared for any worst-case scenarios. It’s better to be proactive and aware of what could be coming. Build a cash buffer, reduce any lifestyle and living expenses and if possible, try to get ahead in these tough times. The key is to be aware and prepared for anything that may happen.
Let me know what you think. Could you manage 7% interest rates or would you be willing to move to another state to live a cheaper life?
M. Moneyman
FAQs
Now some final FAQs to wrap up.
What is CPI?
The CPI is the Consumer Price Index and is often used to measure changes in the cost of living, but it is not an ideal indicator of this. The CPI measures price changes and doesn’t measure true cost-of-living inflation.
Who Measures the Cost of Living?
The cost of living is calculated by the Australian Government via the Consumer Price Index (CPI).
What is the average rent in Australia?
The average cost of rent in Australia is $379 a week ($1516 a month) according to the ABS.
