Ready for a rainy day? Three ways you can cut costs and reduce risks

After yet another blow to household bills with the latest interest rate rise, Australians are now scrambling for more ways to save money and build out their rainy day funds where they can.

Single mother Elizabeth Mitchell is one such saver, progressively building up her emergency fund with the goal of mitigating any financial risks that may surface over the next 12 months.

Initially, she felt comfortable with her emergency fund hovering near $15,000. However, with the rise in interest rates and inflation Mitchell no longer believes the amount will keep her safe. She aims to reach $50,000 before she feels financially secure.

The primary school teacher is concerned about the jump in her mortgage repayments, which will rise from 1.8 per cent to 6 per cent next month.

“I work on a casual basis and I don’t get shifts in school holidays. The turning point to raise my emergency fund was the rise in inflation and interest rate. On top of this, all my living costs have increased.”

Aside from putting more savings away, Mitchell has reined in her spending and looked for better deals on her bills.

“Once upon a time, I’d just pay a bill. Now I shop around, recently I saved $60 on my car insurance. I’ve cut back on weekly take-away meals; it’s now monthly. I’ll make pizza at home. I bought a second-hand bike, so I ride or walk and exercise at home rather than the gym,” she says.

Wealth and financial counsellor Ryan Porter says a cash safety net helps reduce short-term financial anxiety and protects against the unexpected. If you’re starting from scratch; focus on building the first $1000 to $2000, he says.

“Then work towards having three months of living expenses set aside in your safety net account.”

Porter says there are some key areas to look at cutting costs, but this should start with an expense audit. Go through your bank accounts and credit card statements, over the past three to six months to find out what your monthly expenses actually are.

“This exercise will help identify areas where you’re overspending and where you might need to reduce.”

Review your bills: Most likely your insurance on car, health and life premiums have increased significantly in the last 12 months.

“Go through each one and review. Importantly, look for automatic debits coming out of accounts that you may have forgotten about. Check if they’re still relevant. Are you doubling up on things, do you need several streaming services?” he says.

Pay down your debts: In a high-interest-rate environment, one of the best financial strategies is to start paying down your debts.

“Getting out of debt allows you to keep more of your money and reduces the interest the bank makes; which can be thousands of dollars. Get rid of your high interest rate debts as soon as you can.”

Shop around for competitive rates: With the average loan size of $586,000, Australian homeowners are paying around $14,000 more in mortgage repayments compared to what they were paying twelve months ago.

Westpac managing director of mortgages Richard Burton says high inflation, increased interest rates and accelerating rents have put a strain on household budgets, so it’s no surprise Australians are watching their spending. He says a main way to reduce costs is to review your mortgage rate.

“With $300 billion worth of fixed-rate mortgages expiring across the country this year, Australia’s home loan market is more competitive than ever. This is good news for customers shopping around for a cheaper mortgage.”

Burton said the first thing to do is call your lender to make sure they are giving you a competitive offer.

• 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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