Economics

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In 10 years time…

Posted by shartley13 on October 3, 2011

Discuss how inflationary pressures and increased interest rates will affect you in 10 years’ time

 

Increased interest rates, as an effect of inflationary pressures will have many effects on me in ten years’ time. In ten years’ time I will be twenty eight, and part of the labour force, earning an income. If interest rates were to increase in ten years’ time, I will have a greater incentive to save a greater proportion of my income, as I get more in return. This means that I will be spending less of my income.

In ten years’ time, I will probably have a house, which I will either be renting or buying. An increase in interest rates will be bad news regardless – if I own my house, I will have to pay more in servicing my mortgage; if I am renting, the landowners will pass on the increase in their mortgage servicing to me, in the form of increased rent. This increase in the cost of housing – whether through an increase in mortgage or increase in rent, will mean that a greater proportion of money will be spent on this area.

This will affect my lifestyle to different degrees; depending on my level of income. If I am a higher income earner, which I no doubt will be, this increase in interest rates will present fewer ramifications to my lifestyle. They will mean that I will have to cut out my luxury consumption and my travelling overseas will be limited to two trips, rather than three, as I have to spend that money on servicing debts. However, I guess, if I earn enough money, an increase in interest rates won’t affect me at all as I can buy a house outright and thus not have to have a mortgage.

However, if, in ten years, I am a lower income earner, the increase in interest rates will have larger impacts on my lifestyle. As a lower income earner, I will probably be borrowing more money, than if I had a higher income, to finance my day-to-day spending and, if I bought a house, a greater mortgage which has to serviced.  This means that a rise on my income will mean that I have more debts to service and a greater proportion of my income will be debt servicing. If I were a lower income earner, the money which I would be spending on entertainment goods will be utilised in my debt servicing. This means that I get a lower utility, with fewer of my wants being satisfied.

If I am lower income earner, an increase in interest rates may lead to me being in a ‘debt trap’ scenario. This means that to finance my debt servicing, I will take out another debt, whether through the form of a credit card or short term loan. This may lead to a debt cycle, which leads to multiple unsustainable loans being procured.

 

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