Ask anyone and their dog for finance advice and you’re bound to wind up with something useful.
But what about personal finance tips from one of Australia’s top economists?
Inspired by the governor of the Reserve Bank, who in a speech gave four tips on borrowing money to buy a home, AMP Capital’s chief economist Shane Oliver has revealed his 13 no-nonsense personal finance secrets, many of which has been informed by his own personal experience.
And they really are no-nonsense. “I won’t tell you to have a budget … because that’s like telling you to suck eggs.”
1. Shop around
Why do we tend to shop around for our everyday consumer goods but not for financial services?
“As Governor Lowe points out, ‘don’t be shy to ask for a better deal whether for your mortgage, your electricity contract or your phone plan’. The same applies to your insurance, banking, superannuation, etc.” The financial services sector is extremely competitive – they’re all vying for your business.
And if you’ve been loyal to a service for a long time but they’ve hiked fees and charges, give them a call “to ask what gives”, Oliver advises. “I have often done this to then be offered a better deal on the grounds that I am a long-term loyal customer.”
2. Don’t take on more debt than you can chew
Debt is good, up to a point – but you can have too much of it. “Always make sure that you don’t take on so much debt that it may force you to sell all your investments just at the time you should be adding to them, or worse still, potentially send you bust,” Oliver said.
“A rough guide may be that when debt servicing costs exceed 30 per cent of your income then maybe you have too much debt – but it depends on your income and expenses.”
3. Interest rates can go up, too
The chief economist acknowledges that it’s been a long time since interest rates were raised (specifically November 2010). “But don’t be fooled by the recent history of falling or low rates,” he said.
“My view is that an increase in rates is still a long way off (and they may even fall further first) – but that’s just a view and views can be wrong.”
If history is anything to go by, the interest rate cycle will eventually trend up. “The key is to make sure you can afford higher interest payments at some point.”
4. Prepare for rainy days
Quoting Lowe, Oliver reiterated: “Things don’t always turn out as we expect.” This rainy day could come in the form of higher interest rates, a job loss, or an unexpected expense.
“This basically means not taking all the debt offered to you, trying to stay ahead of your payments and making sure that when you draw down your loan you can withstand at least a 2 per cent rise in interest rates.”
5. Treat your credit cards with respect
Oliver loves his credit cards – but he described the interest rates of 20-21 per cent as “usurious” (or extortionate) if he doesn’t get a cash advance or pay the full balance by the due date.
“So never get a cash advance unless it’s an absolute emergency and always pay by the due date. Sure the 20-21 per cent rate sounds a rip-off, but don’t forget that credit card debt is not secured by your house and at least the high rate provides that extra incentive to pay by the due date.”
6. Any longer-term debt to pay off? Use your mortgage
“Credit cards are not for long term debt, but your mortgage is,” Oliver said. “Partly because it’s secured by your house, mortgage rates are low compared to other borrowing rates – at around 4-5% for most.”
Therefore if your debt takes longer to pay off than your credit card due date, consolidate it with your mortgage to reduce the amount of interest you’re paying.
7. Get a head start on saving and investing
To build your wealth, take advantage of compound interest and assets that provide high returns over long periods of time. “But to make the most of it you have to start as early as possible.”
Just to illustrate how your wealth can grow over time, $1 invested into Australian shares in 1990 would now be worth $526,399.
$1 in Australian bonds and Australian cash would be worth $885 and $237 respectively.
8. What goes up does comes down
People expect the share market to be volatile, but not the property market. “Of course property prices will always be smoother than share prices because it’s not traded daily and so is not subject to daily swings in sentiment,” Oliver noted.
“But history tells home prices do go down as well as up.” We’re going through a property market fall right now – so allow for the fact that asset prices go down as well as up, even with a booming population and economy.
9. See the bigger picture
While we might undergo major economic crashes, such as the GFC, every so often, we always recover, Oliver pointed out.
“We have seen it all before even though the details may differ. The trick is to allow for periodic sharp falls in your investment strategy and when they do happen remind yourself that we have seen it all before and the market will find a base and resume its long-term rising trend.”
10. Know how much risk you can take
If you find out the market has wiped 20 per cent off the value of your investments, how will you respond?
“If your response is likely to be: ‘I don’t like it, but this sometimes happens in markets and history tells me that if I stick to my strategy I will see a recovery in time’, then no problem.
“But if your response might be: ‘I can’t sleep at night because of this, get me out of here’, then maybe you should rethink your strategy as you will just end up selling at market bottoms and buying tops.”
Moral of the story is: match your investment strategy with your risk tolerance.
11. Millennials, use the ‘Mum and Dad bank’ if you can
Millennials are being shut out of the housing market thanks to the mid-1990s boom, but the current home price correction could be turning the tide. In the meantime, AMP Capital’s top economist has some tips for millennials living with their baby boomer parents.
“First, stay at home with Mum and Dad as long as you can and use the cheap rent to get a foothold in the property market via a property investment”.
“Second, consider leaning on your parents for help with a deposit. Just don’t tell my kids this!”
12. Be suspicious of water cooler talk
Bitcoin was all the rage a year ago, Oliver points out. “But piling in at around $US19,000 a coin just when everyone was talking about it back then would not have been wise (it’s now below $US6500) even though many saw it as the best thing since sliced bread.
“Often when the crowd is dead set on some investment, it’s best to do the opposite.”
13. There’s no such thing as free lunch
This one is simple.
“If something looks too good to be true (whether it’s ultra-low fees or interest rates or investment products claiming ultra-high returns & low risk), then it probably is and it’s best to stay away.”
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