Some Fatherly Financial Advice on Responsible Money Management

Last night, Janet Yellen was dispensing some ‘motherly’ advice at the Economic Club of New York.

Janet told the gathering that global developments pose ongoing risks.

This was widely interpreted as ‘no more interest rate increases anytime soon’.

The US markets liked what they heard. The Dow and S&P500 both finished in positive territory.

The prospects of China slowing down, or another fall in the oil price, would derail the fragile US recovery. Therefore, cheap money is still what’s needed to keep everything afloat.

Janet only has herself and her predecessors to blame for ‘the global developments’ that are causing her to fret.

Low interest rates created this mess. Without ultra-low interest rates over the past seven years, the world would not have gone on a massive debt bender.

The folly of that fraudulent economic activity is now being played out on our local share market. Banks are provisioning for more bad debts from the mining sector.

European and US banks are also issuing earnings downgrades.

In parenting terms, central bankers have been irresponsible and negligent. They’ve actively encouraged indulgent and reckless behaviour. The spoilt ‘we want it now’ children get rewarded…and the frugal and diligent ones are punished.

With this type of culture, it’s no surprise to see an increase in delinquent debts. There are always consequences for actions. Sometimes it just takes a little longer for some to surface.

Janet Yellen should be worried. She and her fellow central bankers have been derelict in their duty of care to the economy. They have pandered to the demands of those seeking instant gratification. There will be a price to pay for this lack of discipline.

While you and I have no influence over the global economy, we do have the capacity to take responsibility for our personal financial situation, providing sound guidance to our children.

The basics are not always fashionable…especially in a society that is so preoccupied with consumption.

However, the basics do hold you in good stead in the long run.

Taking personal responsibility provided the motivation, five years ago, for me to write a book to my three daughters.

The book is titled A Parent’s Gift of Knowledge. It’s about the fundamentals of money, reflecting on the many philosophies I have on life.

At the time, our two eldest daughters were at university; the youngest was in her final year of high school. Their knowledge of the real world — earning an income, paying taxes, funding living expenses, superannuation contributions, personal insurances etc. — was limited.

Five years later and they have all flown the nest — two are living in Sydney and one in London. They are paying taxes, rent, utility bills, motor vehicle expenses, grocery bills and all the other joys that come with living in a modern society.

The lure of big city living does come with a hefty price tag — rent, in my humble opinion, is mind-blowingly expensive for what you get.

In spite of these costs they assure me they’ve managed to save a modest percentage of their weekly income.

Over the years we’ve had numerous family discussions on responsible money management. It appears the regular chats and lessons learned about how people have succeeded, or failed, financially may have stuck somewhere in their subconscious.

However, it’s too early to count the chickens just yet. They have many more situations and shifty people to encounter before their real-life education on responsible and prudent money management can be judged a success.

It’s my intention to be around for a while to guide them during this learning curve. However, in case life has other plans for me, the book was my Plan B; it was written as a useful reference source for them.

Here are the key points from the discussions with my daughters:

  1. There is no new way to go broke — it is always too much debt. Therefore, you have to control the debt rather than the other way around. Credit card debt is by far the greatest source of grief for the younger (and even older) generation. This transportable, and very expensive, form of an unsecured personal loan has proved to be the ruination of many a consumer. Here are a couple of tips:
    a. When you go out, leave the credit card at home — this minimises the chance to impulse buy; and
    b.Keep the credit limit reasonably low to avoid becoming trapped in a debt spiral.
  1. Don’t believe the property or investment industry baloney about good debt versus bad debt. Sure, taking out a loan for an investment (shares or property) can be a ‘good’ debt — provided the investment appreciates in value at a greater rate than the after-tax cost of servicing the debt. However, if the cost of paying off the debt becomes a burden — and the asset has to be liquidated at a loss (sometimes this can be substantial) — then it’s a ‘bad’ debt. Good debt is only good if the asset you have borrowed for it appreciates in value. The irony is that most people take out an ‘investment loan’ to save tax, when in fact a successful ‘borrowing to invest’ strategy should result in you paying much more tax i.e. you’ve realised significant profit and/or generated income in excess of debt-servicing costs.
  1. Reverse budgeting is so much easier than traditional budgeting methods. Reverse budgeting follows the same principle as ‘pay yourself first’. Most people struggle with itemising their spending line by line on the traditional budget planner. Who really knows how much they spend on presents each year…or the exact costs of running a motor vehicle? Reverse budgeting is simple — work out the amount of money you need to accumulate over a certain period, then allocate this money from each pay cheque and spend the rest guilt-free. For example, you want to have $10,000 in the bank in two years’ time — then automatically transfer $100 per week into an interest bearing account and learn to live on the remainder of your pay check. For longer term goals, use an online compound calculator to determine how much you need to save at a conservative rate of return to achieve your desired savings amount.
  1. Look for opportunities to increase your income. This could be in the form of part-time employment. However, in the spirit of working smarter, and not harder, improving your skillsets would be the preferred way to improve your chances of stepping up a pay grade…or three. Another option could be starting up some form of online business — blog, buying and selling on eBay, etc. However, improving your skillsets is only one half of the equation. One of the many sayings I’ve impressed on our daughters is: it’s attitude not aptitude that will take you to your altitude. Approach life with a pleasant attitude, a friendly smile, and good manners, and you’ll have an edge over 90% of the workforce. So many people seem miserable with their lives — I hate my job; my boss is a moron; they don’t appreciate me; this job would be great without customers; that’ll be $10 (with no please or thank you attached at the end of the sentence). Perhaps their frustration is borne from not knowing how to take control of their lives. Having savings is a liberating feeling — if you are genuinely not appreciated in your workplace, money in the bank gives you the luxury to pursue other employment options.
  1. Be wary of those with vested interests. Ask yourself: what does the person giving me advice have to gain from this transaction? Perhaps their intentions are honourable and the transaction is of mutual benefit. It pays to ask the question rather than make a potentially costly mistake. Develop a BS detector; it’ll stand you in good stead. Remember the old but oh-so-true adage, ‘if something seems too good to be true, it usually is.’

Do the little things right — stow away incremental savings; live within your means; have modest debt levels; develop a habit of learning; and having the common sense to avoid a slick sales presentation are all steps in the right direction to responsible money management and taking control of your life.

A saying I read once sums it up perfectly: ‘We are who we are because of three things, the choices we make, the habits we keep and the disciplines we have.’

While the advice given may seem like common sense, I can assure you in today’s society financial common sense is not all that common.

You only have to look at the advice from our central banking ‘parents’ to know the truth in that.

Vern Gowdie,

For Markets and Money

Vern Gowdie has been involved in financial planning since 1986. In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners. His previous firm, Gowdie Financial Planning was recognized in 2004, 2005, 2006 & 2007, by Independent Financial Adviser (IFA) magazine as one of the top five financial planning firms in Australia. He has been writing his 'Big Picture' column for regional newspapers since 2005 and has been a commentator on financial matters for Prime Radio talkback. His contrarian views often place him at odds with the financial planning profession. Vern is is Founder and Chairman of the Gowdie Family Wealth advisory service, a monthly newsletter with a clear aim: to help you build and protect wealth for future generations of your family. He is also editor of The Gowdie Letter, which aims to help you protect and grow your wealth during the great credit contraction. To have Vern’s enlightening market critique and commentary delivered straight to your inbox, take out a free subscription to Markets and Money here. Official websites and financial eletters Vern writes for:

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