Jeremy Tauri: Keeping a lid on your spending

Reserve Bank of NZ Governor Adrian Orr. Photo / Mark Mitchell

The Reserve Bank wants you to splash out.

It recently cut the official cash rate to 1 per cent, a bigger drop than many had predicted.
The idea behind the reduction is that it will flow through to lower interest rates, which will give people more money in their pockets to spend, which will then help to boost the economy and stave off a possible recession or downturn.

It works to an extent — floating home loan rates dropped immediately and fixed rates have started to move down, too. Many people will now be facing smaller payments on at least some of their debt.

But while the idea of spending more to boost the economy is a good one, and good advice at a population level, it's not such a great plan for individual households.

When there's the potential for a slower economy, it makes sense to pay down as much debt as you can.

There's nothing worse than going into a time of economic uncertainty, when maybe your business might earn less or your job prospects could be slimmer, with a huge debt to worry about.

When interest rates are low, it's a great time to get rid of as much of what you owe as possible.

Any extra you can knock off the principal you have owing to the bank (or anywhere else) will reduce the amount you have to pay in future when interest rates invariably go up.

The investment in loan reduction now will pay off many times over.

Dropping interest rates create an opportunity for pain-free debt elimination.

When you have a loan come off a fixed term, and have the opportunity to move to a lower rate, keeping your payments the same means you pay it off faster without having to spend anything more.

Keeping a lid on your spending may not be the best thing for the New Zealand economy as a whole but for your individual household or business, it's probably the most sensible thing to do.