It’s a recession! How will I cope financially?

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A recession is the name we give a downturn in the economy that has lasted at least 2 consecutive quarters.  Usually an economy is in a recession well before the official statistics are released that prove it.  In a recession, many people loose their jobs.  We have seen huge job losses this year here in Australia, and abroad in places like the United States, and our respective countries are indeed in recession.  When an economy enters a recession, people don’t feel as confident to spend, or they may have lost their job and they don’t have the means to spend as much as they once did.

This reduction in spending causes a vicious cycle of downturn in the economy, as about 60% of the economy is made up of consumer spending.  As an individual it is arguably more important to save money and reduce spending when faced with a job loss or an economic downturn, but for the economy this is painful.  If people don’t spend in shops, then there wont be work for people in retail.  If people stop buying goods, then there wont be demand for goods, and this can lead to further job losses all the way down the supply chain.

So what can you do as an individual in these times?  My best advice is to first make sure your finances are in order.  Step 1: Pay down your debt and don’t acquire additional debt you don’t need.  Step 2: Make sure you have a good financial safety net in savings in cash to cover any emergency expenses that come up.  Step 3: Save for purchases rather than borrowing, and enjoy spending some of your own money.  Step 4: Insure what you love.

 

Step 1: Pay down your debt

It’s a recession — it is a bad idea to borrow money because we don’t know what is going to happen.  No-one has a crystal ball and we cant see into the future to know how long these times will endure.  The last thing anyone should be doing is taking on bad debt in a recession.  So what is bad debt?  Bad debt is taking out debt for things that give you no return and that you will have to pay back whether or not you can afford it.  Bad debt is credit card loans, payday loans, loans on platforms such as AfterPay, ZipPay and similar, housing loans, new car loans, margin lending loans and similar.

A recession is not the time to take on additional debt.  What happens if you loose your job?  How will you service the loan? It’s so easy to rack up huge debts on credit cards or payment deferring platforms, but it is not financially savvy.  What might have once been easy to pay off recurring debts when you were fully employed can become painful or even impossible once underemployed or unemployed.  It is much better to save for the things you want.

If you do already have credit debt, try to pay it off as fast as you can manage.  Be very wary of seemingly cheap balance transfer credit cards, because often the interest rate reverts back to a much higher rate after a set period.  If you need a balance transfer because your credit card interest rate is unacceptably high, look for a card with an ongoing low rate and a low or zero annual fee, which means you will have predictable repayments and no shocks.  Some examples of no annual fee, ‘low rate’ cards with their base interest rates quoted at time of writing this article in brackets, are the ING Orange One card (11.99% p.a. on purchases, 9.99% p.a. on installments), Heritage Gold Low Rate Credit Card (10.80% p.a.), or ME bank Low rate credit card (11.99% p.a.).  Note these are base interest rates, and are often compounded daily by the bank.  My advice is don’t take on extra debt with the card.  Once your balance is paid off and you have a cash safety net saved up close your credit card account and chop up your credit card(s).

You shouldn’t need a credit card or payment deferring platform to live happily.

So bad debt is a thing, is there a such thing as good debt?  Good debt can probably be reduced to education loans, such as HECS in Australia, and reasonably priced housing loans for somewhere to live in retirement — but only if you can afford to make the ongoing repayments.  You can further your education, improve your mind, keep occupied, and you don’t have to pay them back until you are earning over a certain amount, currently about $46,000 each year. My advice is if you are considering higher education, really think hard about what are your best skills, what do you enjoy doing, what were your favourite subjects in school, how you picture yourself in the future, what job or industry you want to work in (if you know), and how you can get there through education (if education is the answer to that question).  If you are not sure, it might be good to take some time off to really think about what you want before you spend any money.  Perhaps take a few free courses and see what you enjoy before enrolling into an expensive university degree.

There are lots of freely available online degrees put out by top universities.  They are called Massive Open Online Courses or MOOCs, and many of the worlds top institutions give out free or very cheap materials online, so that wherever you are in the world, and whatever your financial position, you can access great courses and education.

Universities like MIT, Yale and Stanford as well as many others, offer these cheap or free courses.  A simple internet search for MOOC and the type of course you are interested in, say, Bachelor of Finance, should bring up a range of options.  It’s true some employers wont recognize these free courses, but many employers are beginning to accept them, because they acknowledge that not everyone can afford an ‘Ivy League’ or ‘Group of 8’ education.  Some businesses offer a structured platform for these courses on a paid subscription, such as Coursera.com.  I have trialed an introductory Russian course from Saint Petersburg State University on Coursera.com and I have to say I enjoyed it and the modules were well designed.  I do prefer the free courses though put out by places like MIT, I think they are much more accessible.  I also think it is wise to be a little weary when signing up for subscriptions.  Look for things like early exit fees.

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Step 2:  Create a financial Safety Net

‘We don’t want to be dependent on the kindness [of strangers or] of friends even… There are times when money almost stops…’ — Investor Warren Buffet, speaking at the Berkshire Hathaway 2020 AGM, paraphrasing Blanche DuBois in A Street Car Named Desire.

In times like we are seeing, in financial crises, in deep recessions — for example Greece during the GFC, in times like the Great Depression, or during times of war — money just stops.  It’s not possible to get a line of credit because banks do not want to loan out money, or cannot loan out money.  It becomes impossible for normal people, and even large businesses to borrow money.  For many people, it doesn’t need to be one of these crises times for it to be difficult to obtain credit, for many people, such as those on low incomes or unemployment benefits, not having access to credit is just a daily reality.  It is important to try to save some kind of cash safety net for yourself for emergencies, so you won’t need to rely on the kindness of others.  An extreme example of what can go wrong when you have no safety net (and no social security in France in 1815), is the character Fantine in Victor Hugo’s Les Misérables, who sold her teeth and hair to pay strangers to care for her child.

If you don’t have a safety net, it is a good idea to start saving for one now, even if you just start with $1 in a dedicated zero fee bank account, preferably with a good interest rate, and always in a bank you trust.  Set a goal for how much you need in your safety net.  This might be the money you need for a rental-bond, or a new fridge or washing machine.

It is good to start with a goal that is attainable, so if you currently have no savings, setting a goal like $1000 is a good place to start.  Putting a little away each week, for example $20, and making a rule for yourself that the money in that account money is only used in the case of a real emergency, will help motivate you to save your safety net and not spend it.

Start to think about how much cash you might need in an emergency if you didn’t have access to credit.  Set a goal to save a safety net in cash of that much.  For me, it is at a minimum the excess on my insurance policies and the cost of a bond for a new rental apartment.

An easy way to boost your savings is to immediately add any bonuses you might receive, for example a one off stimulus payment or a bonus from work.  The best way to save however, is putting a little aside each time you are paid and then not touching that saved money.

Zero fee bank accounts I can recommend are ING Bank Savings Maximiser, which has a current variable interest rate of 1.80% p.a. — if you can afford to open a transaction account with ING that you deposit at least $1000 into a month.  Or the Suncorp Bank eOptions Savings Account or Everyday Options Account which allow you to access what Suncorp calls a ‘flexi rate’ which is like a no-minimum term deposit, currently the 12 months term is 0.95% p.a.  I do think at times like these, when interest rates are falling it is good to ‘lock in’ an interest rate you can rely on, so I do lean towards the Suncorp accounts for that reason.

If you feel you need some more savings tips, check out my previous blog posts on saving here: How to save $10,000 from nothing, and here: How to save money when you’re a fashionista.

 

Step 3: Save for purchases

If you are in a good financial position and have your safety net sorted out then it is possible to start also setting a little aside for purchases if you can afford it.  This will bring a bit of happiness, since being able to occasionally have a coffee or meal out with friends is a lovely thing.  Occasionally buying yourself a special treat with money you saved yourself can also bring a lot of satisfaction.  Also knowing that even by spending a little here and there on these little luxuries or buying a coffee from a cafe you like, you are helping the economy and helping keep others in jobs.  It’s good to spend a little, but only so long as it is not placing yourself into potential financial hardship.

It’s a good time to take a look at your spending and see if there is room for savings.  If you have time have a look at your transaction history for the past 3 months, and try to categorize your spending into different areas, such as rent, bills, groceries, health, school, and entertainment.  Is there any unnecessary spending that can be reduced?  Can you switch to a cheaper electricity or gas provider, or a cheaper phone and internet plan to save you money?  Can you substitute some purchases of groceries for lower cost items of the same product?  For example switching from brand names to ‘no-name’ or generic brand items, like Black and Gold or Homebrand in Australia.  Can you afford to start buying in bulk to save money at the grocery store?  Trimming a few dollars here and there can really make a difference.  My main transaction account is with ING Bank, and they recently introduced something called ‘everyday roundup’ which transfers the difference between any card purchases you make and the nearest dollar to a linked ING savings account.  You can choose this automatic saving to round up to the nearest dollar or $5, depending on what is more suitable for you.  This way every time you spend, you save a few dollars or cents.

Another good way to save is to set up an automatic savings transfer that will transfer money from your transaction account, say on the day you are paid or the day after.  Just be sure before setting this up there is money in your account and there are no ‘dishonour fees’ if there are insufficient funds in your account.  I remember being charged $35 by a bank years ago for a dishonour fee, and I was only $20 overdrawn, completely ridiculous.  Most banks in Australia have been forced to get rid of unfair fees such as this after the Banking Royal Commission, but be aware there are still plenty of fees around.

 

Step 4:  Insure what you love

If you have set up a bit of a safety net for yourself, it might be a good idea to also think about insurance and your superannuation [in the US I think this is called 401(k)].  Check your super balance and see how it is going.  For information about how to check your super in Australia click here to visit the ATO website info page on super.  If you have more than one super account, decide which one is best and transfer your balances from your other funds to that one, and close off those unwanted accounts.  When deciding which fund is best, look at their fees (lower is better), insurance (more cover is better),  and returns (higher return on the ‘same’ balanced portfolio product is generally better).  When you get a new job, make sure to give your new employer your superannuation fund details, so they don’t just make you an new account in their default fund. This process is called consolidation.  It reduces your fees and means you will in the long run get higher returns on your super, which is what you want because it is your savings for retirement and it is really important.  If you have a lower balance  it can be eaten away by fees.  The minimum amount a super account can have before it is transferred to a low fee government super holding account is about $100, so you could potentially loose hundreds of dollars or more if you don’t act on it early.  I think from 2019 on-wards if there is period of inactivity in a super account, the super balance needs to be transferred by the super fund to a holding account for the individual at the ATO.  This was designed to reduce losses to individuals caused by inactive accounts accruing fees.

Decide if you can start making a fortnightly payment to your super, even if it is only $10.  This will make sure your superannuation account stays open even if you loose your job and your employer no longer pays contributions.  It is important, because for many people super is how we are also insured in case of terminal illness or permanent disability.  If you are on a low income in Australia and meet the eligibility criteria, the government will make a co-contribution of up to $500 each year if you make voluntary contributions to your super account.  That is even more motivation to save, because it’s a huge free boost for your super savings.

If you stop paying your contributions into your super, and your account is closed, for example due to a low balance (because fees are often still deducted even if you don’t make contributions), you won’t be covered by that insurance anymore.  I admit, a lot of super insurance policies are not the best, but some insurance is often better than no insurance.  We never really know when we might be struck down by some terrible event, so it is much better to be covered by a life insurance policy, and superannuation often offers very affordable policies compared to what else is available.

Outside of super, you can have a look at things like home and contents insurance.  If you lost everything, could you afford to replace or rebuild from your savings?  For most people the answer to that question is no, definitely not.  Even if you are only renting it is a good idea to have contents insurance to cover your possessions, especially if you are well established or have children.  It’s a good idea to shop around for home and contents insurance policies, until you find one that suits you best.  Some are very low cost, for example ING Bank contents insurance for tenants, which is around $25 a month for cover of up to $120,000 in contents (with $500 excess), but they don’t have the more extensive of the cover of other policies.  The ING insurance is basically a no-frills insurance, which is actually really good value for renters, because typically you are not going to need things like ‘motor-burnout’, but you might want to think twice about it because it doesn’t include pretty standard things like ‘flood cover’. Personally I went for a more expensive policy that also gives me more extensive cover and optional cover on items like my laptop and other valuables away from home (which you can also get with ING), and up to 10% of my insurance cover for temporary accommodation for up to a year should something happen to my home that makes it unlivable.  ING Bank does also offer 10% of total insured as temporary accommodation. The insurer only pays the difference between your regular rental payments and the cost of your temporary accommodation.  I think this is quite standard across insurers covering temporary accommodation, they only cover ‘costs actually incurred’.  ING Bank contents insurance also pays for storage of ‘some’ items while you are in temporary accommodation.

This type of temporary accommodation policy under a home or contents insurance policy is also available from insurers such as St. George Bank and Suncorp Bank for around $50 a month for $120,000 of cover (and $2000 excess).  The policies differ slightly and have different levels of excess.  Often you can reduce your monthly or annual premium by increasing your excess, just make sure the excess is an amount you have in cash easily covered in your safety net account, as you will have to pay the excess before the insurer pays a dime.  You will also need to start keeping itemised receipts for every purchase you make. It is a good idea to keep an electronic copy of these receipts, saved to ‘the cloud’, in case your home is destroyed, your receipts will be saved.

It is a great peace of mind to know that if my house burns down,  my child will have a roof over his head and I will have most, if not all, of any additional rent paid in temporary accommodation for a year by my insurer.

 

Closing words

I guess my advice is it is good to think about possible scenarios that life might throw at you, think about the future and prepare for it.  Once you are prepared, it’s a huge weight off your shoulders to feel financially more secure and safer in the event of some undesirable outcomes.  Then you can go out and enjoy the world, worry a little less, and enjoy the little pleasures in life.

 

 

Please read this blog knowing that the advice I give is general in nature.  I don’t know your individual financial circumstances, and this advice might not be suitable for you.  If you are going to make any big financial decisions consider taking financial advice from an independent financial advisor.

Disclosure: I only recommend products that I either use or would consider purchasing for myself or a loved one.  I currently am a customer of Suncorp bank, St. George Bank, and ING Bank Australia.  I own shares in Suncorp Bank.

 

 

 

 

 

 

Are the US, Australia heading for another Great Depression?

In a recent interview with The Bloomberg podcast OddLots, economist Nouriel Roubini predicted that the US would have a bad recovery from the Covid-19 pandemic, inflation and then a ultimately a depression (1). That outlook is bleak. Perhaps not over-reactionary. Over 20 million people were newly unemployed in the US last month. The US has by far been the hardest hit country by the pandemic. It was arguably still somewhat fragile, with low interest rates and high federal debt leading up to the pandemic. In recent days, large companies like Neiman Marcus have filed for bankruptcy. I think it wont be much surprise if in the coming weeks and months weak businesses will continue to go into administration or file for bankruptcy.

In my native Australia we have also seen a worrying trend over the last year  of established businesses going into administration or filing for bankruptcy in the midst of increasingly low consumer confidence. Virgin Australia, Jeans West, EB Games and Kikki-K just to name a few. Many retailers, such as department store Myers and airline businesses such as Qantas have closed their doors and stood down tens of thousands of employees as a consequence of the pandemic. In Australia it seems the pandemic has been the straw, all be it the hay bale, that has broken the camel’s back for these retailers that were already struggling beneath the surface, especially after the tough Christmas we had with bush fires ravaging the nation.

Is recession in the US and Australia likely? Yes, it is imminent.  Is another Great Depression likely? Nouriel Roubini described the possibility of the “I” as opposed to the “V” or “U” shape “recovery”, by “I” shape that refers to straight down into a depression. There could be over 2 million unemployed in Australia right now (2). When I saw the queues outside Centrelink (the jobless office) here in Sydney, that stretched for ~100 m or more —  I seriously worried depression was around the corner. But, the outcome likely depends greatly on government policy and how well it works to alleviate the stress on the economy caused by the pandemic — arguably the biggest economic shock on record. Definitely the biggest shock in the last 100 years. Why government? Because government (rightly) shutting down the economy, has been the force that has stopped so much economic activity. Shutting down or partly shutting down huge sectors of the economy such as tourism, retail, airports and transport. Business can only try to hold out at this time, but it is government pulling all the strings, and for that reason, like it or not we are more reliant than ever on good government economic fiscal policy.

In Australia, quantitative easing policy set out by the RBA should help finance government debt and prevent liquidity drying up. JobSeeker and JobKeeper payments will help people afford their living costs during the pandemic, stay engaged with their employer where possible and hopefully to spend a little to boost economic activity, however spending is probably a pipe dream, with the Australian Bureau of Statistics releasing statistics that over half of people saved their $750 stimulus payment rather than spending it (3). A strong indication in my opinion that people do not feel confident to spend even additional money coming in from a stimulus payment and that consumer confidence is probably still about as low as in April when it walked off a cliff.

Job advertisements in Australia have also walked off a cliff in May. Unemployment, consumer confidence and job advertisements have, to paraphrase Greg Jericho of the Guardian Australia, broken the scale by which we measure them (4). The same can easily be said for the numbers out of the US. As Greg Jericho has said, the scale is broken.

But can governments of the US and Australia hold things together when they have spent so much effort over the past decades dismantling social security and making government smaller? Australia is in a better position considering it has achieved less dismantling than the US, but even we in Australia have put ourselves in a precarious position through the past three decades of policy that targeted cuts to welfare payments, education and healthcare.

(1) OddLots 4 May 2020 Nouriel Roubini Sees A Bad Recovery, Then Inflation, Then A Depression. https://www.bloomberg.com/news/audio/2020-05-03/nouriel-roubini-sees-a-bad-recovery-and-a-depression-podcast

(2) Shane Wright and Eryk Bradshaw, March 23 2020, ‘Worst since 1932′: Two million Aussies face unemployment queue’ https://www.smh.com.au/politics/federal/worst-since-1932-two-million-aussies-face-unemployment-queue-20200323-p54d14.html

(3) ABS COVID-19: One-third of households financially worse off https://www.abs.gov.au/ausstats/abs%40.nsf/mediareleasesbyCatalogue/DB259787916733E4CA25855B0003B21C?OpenDocument date viewed Fri, 8 May, 2020

(4) Greg Jericho, The Guardian Australia https://www.theguardian.com/business/grogonomics/2020/mar/24/when-it-comes-to-unemployment-in-australia-definitions-have-been-broken

 

How are term deposit and credit card interest calculated? Simple vs Compound Interest

Simple interest is the most basic type of interest.  Simple interest is just the interest rate percentage times the original capital (see diagram below).  Some term deposit accounts are calculated using simple interest. In term deposit accounts the interest is usually calculated at the end of each year.

Under a simple interest loan, if I borrow $1 and the interest rate is 10% p.a. then I will need to repay $1.10 after 1 year.

Total repayment = Principle + Interest

=  $1 + ($1 x 10%)

= $1.10

 

Some term deposit interest rates are instead calculated using compound interest. This also goes for credit card interest, personal and home loan interest or even the interest you get on most regular savings bank accounts. The interest on these types of loans and savings is calculated using compound interest. That is interest that is compounded. With compound interest, you pay interest on not just the principle but on interest you haven’t paid off yet from the previous times interest was calculated.

Another way of saying compounded is two things added together or something made bigger. This means that when compounded the interest is made bigger.

Compound interest is calculated more often than simple interest, sometimes daily. In principle it could be calculated every second! A compounded interest rate will generally be higher than the equivalent quoted interest rate using simple interest. Sometimes a lot higher. Banks usually quote the base interest rate and not the total compounded rate which you actually pay.

I am going to use “powers” in this definition. A power is simply when a number is multiplied by itself by the number of times specified in the power. For example 2 to the power of 3, which can be written as 2 x 2 x 2 (= 8) or in short hand as 2^3, which is the same as 2 x 2 = 4 and then that answer, 4 x 2 = 8. Technically this shorthand is only used in software packages like Microsoft Excel, the formal way to write a power is by writing a small superscript of the “power” to the top right hand side of the the number you are taking to the power, as you can see in the figure drawn below.  When powers are used numbers can get big pretty fast – so when interest is calculated this way it can have quite an effect on the amount you end up paying on your debt or receiving on your savings.

If I borrow $1, and the interest rate is 10% p.a. but this time compounded daily. In the formula for compound interest (see diagram bellow), the interest rate, r = 10% or 0.1, the number of times compounded in the year or period, n = 365 days, the years or period, m = 1 year.

In the formula, n and m can refer to days, years, months, quarters, half-years or really any break down of a year. Interest rate, r is always a percentage.

At the end of one year I now have to pay $1.105.

Total repayment = ( 1 + 0.1/365 ) ^ (365 x 1)

= 1.00027397 ^ (365 x 1)

= $ 1.105

By compounding every day, the 10% interest rate is actually higher than 10% after 1 year. I am actually paying 10.5% interest.

This means the effective annual interest rate of 10% p.a compounded daily, is 10.5%.

If you have a bank account that pays interest, you want it calculated an paid as often as possible to get the highest possible interest on your savings. So you can earn interest on the interest you receive.

Most credit card interest is calculated daily. Interest is often also added to the account balance daily so you are quickly charged interest on your interest. This is why credit card debt can get so big so quickly.

I really wouldn’t recommend getting a credit card unless it’s a low-to-zero annual fee and low interest card. It’s much better to save up for what you need, that way you don’t pay any interest and best of all the bank actually pays you interest on your savings (if you are lucky enough to live in a country where interest rates are not zero that is!). Of course everyone’s circumstances are different, that’s just my own personal preference. Unfortunately sometimes it is difficult to pay for large cost items without a credit card because some retailers don’t like to accept large cash payments or a prevented by law from accepting such payments. For those types of purchases I do use a low interest rate, low fee credit card and pay the money back onto my credit card balance almost right away out of my savings so that I am not in any debt and do not owe large amounts of interest (if any).

How I saved $10,000 a year, over 4 years.

A few years ago I had very little in savings in my savings account, let’s be honest and say I had nothing in my savings account after having to spend all my savings on child care fees before my son went to school while I was finishing my degree at university. It was a tough time and when I started living pay cheque to pay cheque I had to really evaluate my financial position.

I found that my Big Four bank account was giving me very little interest post financial crisis. Where I used to get about 6.00 % in about 2007 I was now getting less than 3.00 %  in 2013. The bank had also charged ridiculous fees such as a $35 fee for overdrawing my account by $20. I decided that something had to be done to change my financial situation and getting low interest and paying $6/month in bank fees to a Big Four bank (with billion dollar profits) was not going to cut it anymore.

So I started to do my research and looked up savings account interest rates online for local banks, credit unions and international subsidiaries operating in Australia. I found the best rate offered at that time was with ING Direct (now ING). I had banked with ING in the Netherlands so it was more familiar to me than other online high interest bank accounts. I didn’t have any savings so I didn’t really have much to loose anyway.

The positives for me were that there were no bank fees and that I could withdraw from ATMs for free (when I opened the account you had to withdraw $200 or more for the ATM fee to be paid by ING, now it’s any amount) or withdraw as cashout from the supermarket for free. If I deposited more than $1000 a month to my linked transaction account I would get a higher interest rate on my ING Savings Maximiser account which at the time it was about 3.8 % c. 2013, compared with my 3.00 % now it’s 2.8 % which is to the best of my knowledge still higher than all other online savings accounts in Australia, and much higher than the old Big Four bank account which is currently offering only ~0.81 %.

I actually kept my Big Four transaction account so that I could use cheques to pay my rent (by another financial justification because it was the lesser of two evils when it came to paying my rent). However it is only used and kept open for that reason. If I didn’t need cheques or my new bank account had that functionality I would close it in a heartbeat.

When I recently complained about my low interest rate on my online savings account to the Big Four bank they offered me the same interest rate the offer their new customers, which was ~2.30% for 3 months because I was “a long time customer”, which is really crappy considering I get 2.80% in my ING bank account all the time.

I went with ING because they were familiar to me, but there are other banks and credit unions that offer no monthly fees on savings and transaction accounts, online only high interest accounts. Money magazine ranked them highest that year in that category which was another reason I went with them. And I’m Dutch, so I like orange.

I’ve never really looked back since opening up my online no fee bank account. I deposit my salary into it and I save what I can each fortnight. With ING you can have more than one savings account and give them different names. The down side to this is that the secondary savings account does not attract the higher interest rate, the current rate as of January 2018 is 1.35% which is still higher than the Big Four account. However the advantage is you can have different accounts for different things which makes saving easier.

I have one primary Savings Maximiser account that I NEVER touch (as in I never withdraw from it), which is my home deposit savings account, originally it was going to be for a holiday to Europe, but after some deliberation of my priorities I decided purchasing our own home might be more important than a holiday. It receives the higher interest rate and contains the bulk of my savings. I have a secondary savings account where I save up for bills, school fees and other expenses which gets used regularly.

Because I often can’t afford to pay big bills like the electricity bill out of my fortnightly salary, having an account where I can save a bit each week so I have enough to cover all my bills when they come in is really handy. I also use this account to save for trips to Queensland to see my parents or little getaways once in a while or any large purchase, like a new computer or washing machine. I’ve called it “Expenses Rainy Day” account, but it could have easily been called “Bills and Expenses” account.

I said earlier that I kept my Big Four bank account for the cheque functionality, I did also keep the online savings account because it attracts no fees and I wanted to see if the interest rate would improve, but I again don’t touch this account. I kept this account because I am a highly skeptical and somewhat pessimistic person. I don’t place a huge amount of trust in any financial institution. I kept this account basically in the case there is a real emergency, and I need a few thousand dollars. A while ago I worked out the cost of moving house if we were evicted and our landlord refused to give us our bond back and we lost the tribunal would be about $3000. That would cover the cost of paying a new bond and movers to keep a roof over our heads. I decided that $3000 was the baseline savings I had to have for a real emergency.

I kept it in that bank because I wanted to spread my cash investments, like you would if you were investing in the stock market. You wouldn’t just invest all your money in one firm in case that firm failed. I figured in the worst case scenario, if Australia were to have a Greek style collapse of the banking system, I’d want my money to be in more than one bank. I never want to be in a situation where I loose everything because my bank fails and the government fails to bail them out. Luckily the chances of this happening are very low in Australia, but like I said, I’m a skeptical person. The fact that it’s in another institution to my transaction account means I am also less likely to be tempted to dip into this money.

Recently I’ve been looking at my dismal ~0.80% interest on this account and thinking along the lines of John Bull and 2% interest rates, to paraphrase, John Bull can stand many things but he cannot stand 2% and this is less than half that amount. So I have been researching interest rates again to see if I can find a better deal for my $3k that is at least in line with inflation. The best I’ve found so far is Suncorp’s eOptions account, currently offering 1.55% on savings, which is almost twice the rate of my unhappy account. It’s a bricks and mortar bank rather than purely online and it is larger than some of the other “small banks”. This would be a much healthier interest rate for my emergency fund. An account can easily be opened online, but the drawback is the easiest way to withdraw money due to Suncorp’s token and secondary password system is to also open a linked transaction account. The best thing to do is to either not get the card and go to a branch directly to withdraw funds or destroy the card or if you can’t bring yourself to do that put this card somewhere safe where it won’t be stolen and basically forget you have it, for instance if you keep your title deeds or another precious possession in the bank then put the card with that. By using another bank there is less temptation to spend my emergency fund money. The card definitely doesn’t belong in my wallet. Really I don’t even need this card, because I can walk into a Suncorp bank to make my withdrawal if that worst case came to be. However if there was a Greek style collapse, the banks may not open their doors and you may need a card to access the ATM.

I have been saving with my partner who gives me about 65 % – 70 % of his pay cheque to pay our bills, rent, sons school fees etc and keeps some aside for himself to buy groceries and general expenses like pay for his various hobbies or if we have a day out. I use his pay cheque for most of our expenses and cost of living and basically try to save as much of my pay cheque as possible. From saving this way and focusing on saving as much as we can afford I have managed to save with my partner over $40 000 over the past 4 years which is more than I could have hoped for considering our living expenses are fairly high in Sydney but I am still working towards having enough for a home deposit. I try to save regularly and save what we can afford.

My partner pays me as soon as his pay cheque clears and I distribute this money as soon as it enters my account (either paying bills immediately or putting into my cheque account for rent or the bills savings account). I put my money into savings as soon as my pay cheque clears so there is no temptation to spend it. Saved money does not exist in my mind as spending money. I figure out approximately how much my major bills like phone, internet, electricity, gas, ambulance insurance, swimming lessons for my son etc for the year cost add a bit extra for unexpected costs and divide that number by 26 weeks, so I know how much I need to save in my bills savings account each pay. I work out how much I need for rent and set that aside too. Then I figure out how much I need to spend on travel and food and leave that in my transaction account and then I put what I have decided I can afford into my home deposit account. Sometimes I might put some of the money destined for the home deposit account into my bills account just in case other expenses come up like an expensive school camp or new school uniforms or shoes.

I try to be aware about my expenses but I don’t let my self worry about bills because I know I am prepared and I have enough to cover all my bills saved. It’s a nice feeling to have peace of mind, and takes away a lot of stress in your life.

I want to make a disclaimer that you should not take the general advice on my blog as qualified financial advice and that you should make your own decisions or seek advice from an independent qualified financial advisor about your own finances based on your unique circumstances.

I recommend listening to any good financial advice that is offered to you and considering if it is best for your circumstances before following it. Don’t blindly follow what people tell you to do including me, always consider if it’s right for you in your own situation, and if you’re not good with money seek professional advice or go to the government website moneysmart.gov.au

Before I make any major financial decision I always try to remember my friend who in university lost $20 000  that their parents had given them to cover their living expenses on the stock market, thinking they could make a profit and who after loosing all that money was very very poor for the rest of that year. At the time being a poor student myself I could hardly imagine having $20 000 in the bank let alone loosing it on the stock market. Knowing what can happen when you make a poor financial decision made a huge impression on me. 

Last Christmas my mother bought me a book called The barefoot investor by Scott Pape. Scott Pape has formed a very similar savings strategy to mine, he is a good writer with a style that is easy to digest and I recommend the first chapter of the 2017 edition on savings accounts. I didn’t follow his strategy when setting up my savings account strategy, I hadn’t even heard of Scott Pape before my mum gave me the book. Previously to me Barefoot was a film from Germany about a girl with mental illness.

 

 

 

 

 

 

 

 

 

The Looming Sydney Housing Crisis

What is it that people say? It’s a recession until you loose your job, then it’s a depression. I feel it’s a bit like that with the Sydney housing market. It’s not a crisis, it’s a bubble, until your bubble pops and you are pushed out of the property and rental market because you’ve been out priced.

One of the problems with the Sydney housing market is that it’s been treated by many as an easy no brainer investment class. I’m talking about people who buy houses as an investment to sell at a profit rather than to live in them. It doesn’t really matter whether they are local baby boomer investors or overseas investors, the end result is that because there has been so much speculation in the market for so long, we in Sydney (and Melbourne) have seen an artificial elevation in house prices that is not linked to wage growth. This has ultimately out priced many younger people from the market, and basically anyone who wasn’t on the property ladder to begin with.

Now there is a phrase I have a real problem with “the property ladder”, which implies a buying and selling of properties to upgrade ones housing, presumably for comfort, but more recently (say the last decade at least) for sheer profit.

The thing about houses is they don’t generate any income until they are rented out or sold, and if you have a very big loan you won’t really see the revenue until you sell. People have seen housing as an easy get rich quick scheme, they don’t tend to loose value because people always need somewhere to live, and the more people started investing, the more new investors were drawn in. Until recently property investors (that sounds a bit ominous “investors”, but here I mean anyone who was not buying a property for themselves to live in long term) could buy in parts of Sydney and sell a year later making a 20% profit. It’s a bit reminiscent of other bubbles in the past, most recently the Bitcoin bubble which worked on the same easy money principle.

The problem with the housing bubble, is that it’s not just currency like in the case of Bitcoin, it’s houses, that is homes that people live in. If prices get too high many people are spending too much of their income on loan repayments or rising rent prices. This becomes a delicate balance and if something happens, like you loose your job or prices go up again or let’s say interest rates rise, some people are ultimately going to be pushed off the edge, when their bubble pops (e.g. they can’t make their mortgage repayments and default on their loan). This  can even be the first step towards homelessness. If you are a young person paying high rent with low wage growth and probably low wages due to the casualisation of the workforce that is happening in Australia, you can’t even save enough money to become an investor or home buyer to get yourself out of paying high rents.

The problem is, houses only really generate income when they are sold, and because people have seen the housing market as an easy way to make money there has been a massive wave of speculation. The housing market isn’t as complicated as the stock market, prices have tended to go up without the investor having to do much research or anything much once they have invested. Sure this has made some people rich, but the purpose of housing, something I think people in Australia and some other parts of the world have forgotten, is that houses should be viewed primarily as places for people to live in, not an income generating stream or investment class.

Investing in housing only pushes house prices up and doesn’t have any real benefit. Because really, if you own a place that is overvalued, there will eventually be a price adjustment (read price fall). You don’t really have a million dollars if you own a house valued at million dollars. You own a house and if you sell you will only receive what the market says it’s worth. You only have a million dollars if you sell that house for a million dollars and put that money in the bank.

People should be investing in local businesses and companies as those forms of investment do generate income and they can cause growth in the economy in areas that actually have some benefit to Australia like growth in jobs and wages. Australia has had so many great new technology companies leave because they couldn’t find investors here. The ones that spring first to my mind are the new energy solar power companies that went to China or the US when they couldn’t find investors here. There are your jobs of the future and they’ve all gone overseas and will never benefit Australia.

Australia having a trillion dollars in private home loan debt is not benefiting anyone except the banks that are selling the majority of the loans (1), who will see even more profits roll in when interest rates eventually rise, and they will eventually rise . It wasn’t that long ago real interest rates were around 6% and in the 1980’s they came close to 8% (2). I’m talking about real interest rates too here, not what the banks charged as the interest rate on their home loans which reached staggering levels close to 17% in the 1980’s. Anyone with a large home loan should be very concerned about what interest rate they are paying. If interest rates were raised a few percent higher without wage growth in Australia, many borrowers would default on their loans.

Being tied to high home loan repayments and rents also limits what households can spend as consumers, because all their income is going into housing. This also does nothing to stimulate wage growth and other parts of the economy.

To exacerbate the problem there has been very poor housing affordability policy by all levels government which has played a part in rising house prices and household debt.

The Housing Bubble and Homelessness

We are already seeing the effect of this bubble in the increase in homelessness in Sydney. Don’t think there is a connection between homelessness and rising house and rental prices? Think again. When the Government doesn’t provide enough crisis housing or long term housing for people on low incomes, and the unemployment policy is that if you leave an area with more jobs (like Sydney) for an area with less jobs (like a country town with a cheaper cost of living) you could be cut off unemployment benefits.

So picture the scenario,  you loose your job or you get sick and can’t work for a long period, then because of the drop in income you can’t pay your rent or mortgage and you loose that place. You can’t afford rent on a new place in your area because you haven’t found work again and there is not enough crisis accommodation for all who require it, so you have to find somewhere to go. You probably can’t leave Sydney and move somewhere cheaper because you will be cut off any unemployment benefits by the Government. If you can’t find a place you can afford in the city and unless you have someone who can support you you might eventually end up homeless. you might couch surf for a while, but one day you might run out of people to stay with or you might have some kids, and your friends don’t have room for all of you, so you are living in your car, until you can’t afford your car anymore.

This is a reality, and it is partially caused by housing speculation. There are however many other contributing factors to homelessness. Low wage growth, poor housing policy by Government, poor (or should I say stagnant and un-evolving) unemployment benefit policy and poor mental health and domestic violence policies by Government have all contributed to homelessness in Australia.

 

Seven things I hate about Sydney

Here are the seven things I hate about Sydney, Australia. I have lived in this city for 15 years and in many ways I love this city, but there are some things that make absolutely no sense in this city’s infrastructure and housing areas.

1. The lack of effective public transport, there could be much better public transport routes built, if money was invested in light rail* as opposed to building more highways. We used to have light rail out to Parramatta, but what did we do? Rip it all out to make room for cars on the highway, the most stupid idea ever. I have been telling this to anyone would listen over the past decade.

*Recently in the past 2 years there have been positive moves in this area, with the building of new light rail in the Eastern Suburbs and Inner West, however in my opinion there hasn’t been enough emphasis on this kind of infrastructure and roads are still a major part of infrastructure policy.

2. Linked to this is the amount of cars on our roads, seeing cars with one commuter within in the mornings in every single car clogging up the roads across Sydney is not uncommon. Yet people in this city need cars, because of the lack of public transport to many areas, the unwillingness by many to use public transport, and finally the sprawl of the suburbs being so large that it’s impractical to use bicycles.

3. The lack of high density living, not only in areas within 8 km of the city, but the fact that the suburbs sprawl on forever due to land sizes being too large. Most of the time the land has been wasted and goes unused. The mistakes that were made with housing in this city are staggering and just drive me mad. There are too many parking spaces that waste perfectly good land that could be used for housing. There are far too many single story homes on large blocks even in the inner city (i.e. the Inner West, Lower North Shore), if homes are higher their footprint can be smaller and you can fit more people into the area (think of the Western European cities).

4. The way speculation has driven up the housing market in the past ~15 years especially, at ridiculous amounts, if your house price is increasing by $100,000 a year [2-4], there is a serious problem with the market, only everyone was too blinded by greed to see it until it was too late. For example, in the year from January-December 2000, house prices in Sydney rose by 5.9 % [1], the next year in 2001, house prices skyrocketed 17.2 % [2]. In 2002, house prices in Sydney rose 22.2% [3]. There were a few years of weak growth and falls due to the financial crisis, however the market has picked up, going forward to 2013-15, house prices rose approximately  7 – 11 % each year [4]. Even now, many people refuse to admit or do not realize how inflated housing prices have become, and that this will cause massive social issues in the future if the demand is not met. There are fears of increasing supply (over 100,000 new homes are required in Sydney [5]), because a fast increase in supply could cause a market crash. Although a crash in prices might seem good for new home buyers, it would devastate current homeowners, especially those with large mortgages (and Australians currently have a staggeringly high level of person debt), and those who have invested in housing for their retirement plans. It’s difficult to see an easy way out of this conundrum, with out the implementation of very different social housing policies.

5. The lack of affordable rentals especially for young people who don’t yet have the salary to buy their own place, such as university students. Rental accommodation around the major universities is ridiculously out of price range for the average student. Basically unless you have a full time job, a well-paid part time job, or wealthy parents your rental options are very limited.

6. More and more people are becoming homeless in our city partially because of poor housing affordability.

7. The lack of safe cycling routes, i.e. more widespread dedicated cycling lanes would make it safe for more people in the inner city to commute by bike. Increasing cycling over the use of automobiles would decrease traffic congestion, not to mention reduce carbon emissions.

[1] 6416.0 – House Price Indexes: Eight Capital Cities. Australian Bureau of Statistics. URL: http://www.abs.gov.au/AUSSTATS/abs@.nsf/DetailsPage/6416.0Dec%202000?OpenDocument

[2] 6416.0 – House Price Indexes: Eight Capital Cities. Australian Bureau of Statistics. URL: http://www.abs.gov.au/AUSSTATS/abs@.nsf/DetailsPage/6416.0Dec%202001?OpenDocument

[3] 6416.0 – House Price Indexes: Eight Capital Cities. Australian Bureau of Statistics. URL: http://www.abs.gov.au/AUSSTATS/abs@.nsf/DetailsPage/6416.0Dec%202002?OpenDocument

[4]  Australian Bureau of Statistics. URL: http://www.abs.gov.au/AUSSTATS/abs@.nsf/DetailsPage/6416.0Dec%202015?OpenDocument

[5] http://www.smh.com.au/business/nsw-housing-shortage-at-unprecedented-level-20160325-gnr37f.html