How to budget as interest rates rise

Having a solid budget is crucial to building financial resilience and as rising rates continue to put pressure on household finances, it could help to look at ways to save more and spend less.

With Australia being one of the most highly leveraged countries in the world¹, the average mortgage for owner-occupied properties is just over $600,000² – any increase in home loan repayments could see millions of householders scrambling to pay the bills.

Fortunately, there are ways you can help to relieve the stress on the household budget and build financial resilience.

If you have the flexibility, you could adjust your home loan – either by fixing part of your mortgage to reduce the impact of further rate increases or by reducing your repayments if you’re paying more than the minimum required (although bear in mind this means you’ll take longer to pay the loan off and pay more interest over the life of the loan – so, in the long run, this may not benefit you).

Or you could look at where you might be able to make other savings in your household and personal budget.

Three steps to creating a budget

Spend less, save more. It sounds easy but finding ways to cut back can be tough, particularly when you need to allocate more of your income to mortgage repayments.

The best way to start is creating a budget.

A budget is a great way to set down how much you’re spending (your outgoings) and how much you’re getting in income (your incomings).

Calculate your income. Include everything – any money you earn from an employer, any money you receive from the government and any money you earn from investments.
Work out your expenses. Look at what you spend and don’t miss anything; you might be surprised at what you could cut back on. From council rates, gym memberships, and insurance to daily must-haves.
Use an online budgeting tool such as MoneySmart’s Budget planner to help you determine where your money is going.

Ways to cut your spending

You could divide your spending into different buckets – essentials like home loan repayments, grocery bills, utilities, transport and medical expenses – and discretionary spending like eating out, travelling and leisure activities.

Whether it’s regular payments or your entertainment spend, there could be ways to save more as interest rate rises start to bite.

Instead of looking at your budget and feeling overwhelmed, see it as an opportunity to help shape a happier future and keep you on track to reach your financial goals.

Could you shop around for a better deal on utility bills like gas, electricity and water?
Could you drive a bit less or even consider whether you need a second car if you have one? Think of all the petrol and tolls, it all adds up.
Could you shop at a more affordable supermarket or buy in bulk to make savings?
Could you cut back on paid subscription services in favour of free TV-on-demand services like ABC iView?
Could you take advantage of cheaper deals when going out like midweek specials at local cinemas and restaurants?
Could you look at cancelling memberships you’re not using in favour of cheaper options – instead of the local gym you could take up cycling or running.
Could you manage any other debts better by consolidating them into a single loan so you’re paying less interest?
Could you shop around for cheaper health insurance and consider generic brands with any medications?

Other items to consider

Quarterly yearly expenses that pop up, such as council rates, strata, car/contents/house insurance. These bills come around all too fast, and preparing for these larger expenses is important.
Remember your furry friends and their expenses to, from food to vet visits and pet insurance.
Physio, dentist, chiropractor, health check-ups.
Wedding, birthday and Christmas expenses.

It’s a good idea to set up direct debits and digital payments to have an electronic spending record. Setting this up the day you get paid from work means you won’t default on your regular repayments.

Reviewing your budget

Make sure you review your budget regularly; there are always other expenses that creep up and changes in circumstances, such as

Getting a new job or promotion
You have a baby
Saving up for a holiday
Being made redundant
Getting married or divorced
Repairs and servicing

When reviewing, take note that you may find that in some seasons, there are more expenses than others, and there are irregular expenses that you didn’t initially consider.

Three steps to creating a budget

Ways to cut your spending

Other items to consider

Reviewing your budget

We’re here to help

SIGN UP TO OUR NEWSLETTER