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Interest rates: one sure way to box your lifestyle

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There is one essential reason why you must generate multiple income streams, and it has everything to do with interest rates.
 
Interest rates have been on the news agenda for the last few years. In South Africa for example, rates have fallen by more than 6% from a high of 15.5% in June 2008 to its current level of 9%. This is the lowest rate our country has experienced since April 1974. 
 
Why should you care? Whether you’re an investor, saver, consumer, pensioner, home owner, vehicle owner or glorified philanthropist,  rates affect your bottom line.
 
►There are a few things you need to be aware of:
  1. The cost of borrowing money is determined by interest rates. The higher the rate the more you pay.
  2. On the flip side, interest rates determine what you get paid for your investments. The higher the rate, the more you earn.
  3. Rates are dependent of many factors including local and international economic conditions.  
  4. Local banks make use of what is known as the prime interest rate to set prices on deposits and loanable funds.
  5. The South African Reserve Bank (SARB) is the chief cherry in charge. Their main purpose in life is to control inflation. As a result, they influence the prime interest rate and therefore the rate at which local banks lend money to consumers or pay investors.
With that in mind, have a look at the following scenarios:
 
A. Home owner
Home loan               Interest rate              Monthly bond repayment
R1,000,000               15%                            R13,168
R1,000,000               8%                              R8,364
 
B. Investor
Bank deposit           Interest rate              Monthly interest income
R1,000,000               10%                            R8,333
R1,000,000               5%                              R4,167
 
In a high interest rate environment, home owners pay more whereas investors earn more. In a low rate environment, home owners pay less whereas investors earn less.
 
What may be a good thing for asset owners, lower rates present a challenging situation for pensioners.
 
What you normally find with retirement planning is that the older you get the more conservative your investments become. In other words, retirement funds shift to safer investments that depend on interest rates for income.
 
What this means is that interest rates determine your income level during retirement. And who control the rates - the central bank or government.
 
Talk about relinquishing control to the state during your golden years!
 
I’m sure the problem is obvious to you by now. Living standards during retirement are highly susceptible to rate changes.
 
Ultimately, with living costs and electricity prices increasing, pensioners face an uncertain future.
 
►What’s the moral of the story?
 
It is absolutely essential that you build multiple income streams that are not primarily dependent on rates. The more you ‘distance’ your income sources from rates, the more flexibility your lifestyle will have. 

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