It might feel counterintuitive to pretend this extra money doesn’t exist after penny-pinching for so long, but there are wiser ways to make it work for you.
It might feel counterintuitive to pretend this extra money doesn’t exist after penny-pinching for so long, but there are wiser ways to make it work for you.
Opinion
February 23, 2025 — 4.01am
After four long and painful years and 13 consecutive hikes, the Reserve Bank of Australia has finally delivered a much anticipated 0.25 per cent cut to the cash rate, which will have rates return to what they were 15 months ago in November 2023 – 4.1 per cent.
Sure, 0.25 per cent won’t alleviate all the pain we’ve collectively felt over the past few years. But with the major banks already committing to pass the cut onto mortgage holders by as early as March 4, it’s certainly a good start.
So what, if any, difference will this rate cut mean in real terms? If you have a mortgage of $500,000, you stand to save around $960 per year. At $750,000, this saving climbs to $1434, and at $1 million, you’ll be $1913 better off within the year.
If you live in Victoria, where the average home loan is $614,740, the rate cut will leave you with roughly $97 extra in your account at the end of each month, or $1164 each year.
If you’re in NSW, where the average mortgage is $779,239, it works out to around $123 extra every month, or $1476 after 12 months. As I said, not exactly as life changing as winning the Lotto, but certainly not nothing.
But for all the relief and the promise Tuesday’s cut comes with, there are also a couple of risks.
It might feel counterintuitive to pretend this extra money doesn’t exist after such a prolonged period of penny-pinching.
The first is the belief that this cut is a sign of more to come, and that a sustained decline over the next year is a done deal. As RBA Governor Michele Bullock seemed at pains to point out at Tuesday’s press conference, “the market is expecting quite a few more interest rate cuts by the middle of next year; about three more on top of this”.
”Whether or not that eventuates is going to depend very much on the data. Our feeling at this moment is that that [prediction] is far too confident.“
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In other words, don’t hold your breath because worst-case scenario, it could well be another 15 months before we see another.
With that in mind, taking full advantage of the 0.25 per cent savings and making it get to work immediately is even more important. Because the risk of relatively modest savings such as $97 or $123 per month is that it will be quickly absorbed and spent before you even realise. And that, my friends, is a pesky little financial habit known as lifestyle creep.
Most often, lifestyle creep relates to small changes, upgrades, splurges or luxuries we treat ourselves to over time as our incomes increase. Say you receive a pay rise and decide to start buying your lunch each day instead of bringing it in.
Maybe you treat yourself to a new serum, or buy yourself a new suit to celebrate. Then, perhaps when your next raise comes, you decide to upgrade your car or go on a well-deserved holiday. Suddenly, that salary bump has disappeared.
Lifestyle creep can also come with other changes in your financial circumstances, such as the stage 3 tax cuts, which are leaving Australians with an extra $31.90 per week on average, or this week’s rate cut, which will leave the average Victorian mortgage holder with an extra $22.40 a week.
If you’ve just received a promotion, or in this instance, white-knuckled through 13 interest rate hikes over four years, it’s understandable that you’d want to enjoy having even the tiniest bit of spare change left over at the end of each week.
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But the biggest problem with lifestyle creep is that it can be very difficult to reverse once you’ve experienced the nicer things that come along with having more money.
And that’s why, when the saving from the interest rate drop hits your bank account from next month, however much it ends up being, you should be keeping two things in mind. The first is that you are in control of your money story, meaning if anyone can hit the brakes on lifestyle creep it’s you.
The second is why it’s so important to hit the brakes now. This comes back to what Bullock reiterated a number of times on Tuesday: that more cuts are not necessarily on the way. Global economic uncertainty is extremely high right now. The United States’ proposed tariffs (and the unpredictability of the president making the announcements) is just one example of this.
So, assuming this week’s interest rate cut is the only one to come for some time, it is essential to make it count.
Say you live in Victoria and have a mortgage of $614,740 or live in Sydney and have a mortgage of $779,239, both with an interest rate of 6.15 per cent. Making minimum repayments of $4027 per month or $5102 will see your loan paid off within 25 years and one month.
But if you were to add $97 per month or $123 back onto the mortgage through additional payments, you can shave 15 months off the loan time – the same amount of time between the last interest rate rise and this week’s drop – and see it done and dusted within 23 years and eight months.
Another option would be to invest. In this scenario, $97 per month over the same 25-year span in an investment portfolio with an average rate of return of 9.2 per cent will see you end up with $113,400, or $143,796 if you’re putting away $123 per month.
If you’d feel safer having the extra money easily accessible for emergencies, a savings account with an interest rate of 5 per cent will see that $97 per month grow to $58,102 over 25 years, or $73,676 when saving $123 per month.
It might feel counterintuitive to pretend this extra money doesn’t exist after such a prolonged period of penny-pinching. But you’ve just spent the past 15 months living without it so, by now, you’re basically a pro.
Victoria Devine is an award-winning retired financial adviser, bestselling author and host of Australia’s No.1 finance podcast, She’s on the Money. She is also the founder and co-director of Zella Money.
- Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.
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Victoria Devine is an award-winning retired financial adviser, best-selling author, and host of Australia’s number one finance podcast, She’s on the Money. Victoria is also the founder and managing director of Zella Money.
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