Do you wish you could kick those nasty spending habits?
The ‘routine’ purchases that creep up over time without you noticing?
Like the long-black coffee setting you back $5 every day?
Five of those every week will leave your bank account looking $1,300 lighter every year. And that’s before life’s other unnecessary ‘necessities’ get in the way.
Little wonder then that Australians love nothing more than a debt binge. Recent data from Digital Finance Analytics revealed that one in five middle-income Aussies had no room in their budget for unexpected expenses.
With record-low wage growth, rising house prices and creeping inflation in groceries and utilities, we wonder whether households have enough for expected expenses.
But what do we know? We see streets lined with people sipping coffees in fancy cups at cafes. Prosperity abounds, it seems.
Here at the Markets and Money, we’re not inflexible in how we see the economy.
Our stable has its fair share of bears and bulls.
Callum Newman, editor of Cycles, Trends and Forecasts, is optimistic about the Aussie economy over the next decade. He says that an 18-year cycle, which governs the real estate market, drives the economy.
Callum believes Australia’s situation is nowhere near as critical as the doom-mongers would have you believe. It’s a refreshingly optimistic outlook. Whether you’re of the same mindset or not, you owe it yourself to learn about the 18-year land cycle.
At the same time, we also publish views that take a distinctly bearish view on the economy.
Stein was an American economist and chairman of the Council of Economic Advisers under US presidents Richard Nixon and Gerald Ford.
He famously stated that that if something cannot go on forever, it will stop. By this, Stein meant that, if a trend could not go on forever, there would be no need for any action to make it stop. In other words, it would stop on its own accord.
As Vern suggested, Stein’s Law finds a natural partner in the Sydney housing market, which continues to see rising price growth.
Since house prices cannot keep going up forever, eventually, they won’t.
The point at which that occurs could be next week, or next century. No one can say for sure.
But the conditions encouraging price growth in Sydney remain in place for now. Local government red tape is creating land shortages, which is limiting supply and pushing up prices. Throw in demand resulting from cheap and easy credit, and you have the perfect recipe for price growth.
Yet what if home loan rates were at 10% instead of 3%? Would prices keep rising? Probably not, as Vern suggests.
And don’t for a second assume that’s an unrealistic level.
As Vern explained, banks have to source one-third of their funding from offshore markets. This means that international bond markets become relevant to domestic borrowing costs. In other words, if bond rates were to go up, Aussie home loan rates would rise in tandem.
The likely outcome would be a surge in defaults as highly-leveraged households started selling up.
This worries us when we read that ever more Aussie households are going into debt. According to the Australian Bureau of Statistics, 70% of households had some level of debt in 2013–14. Of these, 26% were servicing a total debt three or more times their annual disposable income.
We have cheap borrowing costs to thank for sobering figures like that.
The rise of credit, calculated at rates which are ‘manageable’ for the lowest of income earners, is worrying. But of equal concern is the fact these rates only need to double from present levels to push middle-income earners beyond the breaking point as well.
To escape the debt trap, Aussie households need to save more, and borrow less. But how?
A budget free from buyer’s remorse
We realise that it’s easy to dole out advice when it comes to money management.
Like you, we’ve heard it all before. Draw up a budget, and stick to it. As if that sage counsel will swell bank accounts overnight.
We’ve tried that before. And we’ve failed time and again. We imagine you’ve found yourself in the same boat at one time or another.
But we think we’ve finally stumbled on a solution.
Recently, we were reading Vern Gowdie’s new book, How Much Bull Can Investors Bear?
It’s a fascinating account for why you need to take back control of your wealth and assets from money managers. It’s also a timely warning in today’s low-return world. We suggest taking the time to read it as soon as possible if you haven’t already. You can learn more here.
As much as we enjoyed the book, even we didn’t expect to find such a simple and effective budgeting tip in there. But we’re glad we did. It has changed the way we think about money.
We’re sharing it with you today.
So, without further ado, here it is in all its simplicity:
Decide how much you want to save every paycheque. And then spend the rest on whatever you want.
As a disclaimer, your editor is a fully-fledged frugalist. So we don’t lightly say that this was a revelatory way to think about our budget. But it makes an awful lot of sense, doesn’t it?
Instead of constantly thinking about what you need to cut back on, set aside a certain amount every paycheque. You’ll have to decide the amount based on what your goals are.
Then it’s a simple case of narrowing down what you need to set aside to meet your goal. We suggest opening a savings account if you don’t already have one. That will ensure you don’t ‘accidentally’ eat into your savings.
Life’s a lot easier when you don’t have to think about how to restrict your spending habits. This strategy will also keep the guilt at bay whenever you do indulge in your favourite vice.
This week in Markets and Money
On Tuesday, Jason Stevenson predicted the ASX 200 would hit 5900 by Friday on the back of a rally riding on Trump’s proposed corporate tax cuts.
Despite this, Jason questioned why so many investors continue to ignore the bull market. Too many investors fear a stock market crash, choosing to remain in cash instead.
But the real threat isn’t the stock market; it’s the government bond market.
With many investors moving savings into government bonds, they stand to lose a fortune during the next financial crisis. The signs are already troubling.
If you’re waiting for a stock market crash, Jason says you’ll be waiting a while. He believes you should look to invest in your favourite stocks during smaller corrections. And he’s pinpointed two commodities that could fare better than most. You’ll find them here.
Staying with commodities, Jason dedicated Wednesday’s Markets and Money to one of his favourite plays in the market today. It’s one that you rarely hear about. And one that he believes is far from reaching its peak on the ASX. Find out all about it here.
Last week, contributing editor Shae Russell asked female readers to post stories about why they were, or weren’t, investing in stocks. In Thursday’s Markets and Money, Shae shared some of the many reader responses she received.
The big take-away: Industry jargon holds back many women wishing to enter the stock market. One more reason you won’t find that kind of jargon here.
Changing tack, do you think an 80% stock market correction is likely? Probably not. But neither was Leicester City winning the Premier League, or the New England Patriots coming back to snatch the Super Bowl in overtime.
As we saw with Brexit or Trump, not all bets are certainties.
The current Volatility Index, a popular measure of volatility on the S&P 500, doesn’t suggest a 50% market crash is likely. Which puts an 80% correction on par with Leicester City winning the title at 5,000–1 odds.
No one is expecting it. Which is why you should be worried. When the next crisis hits, it could dwarf 2008. Click here to read why in Friday’s Markets and Money.
Finally, a reminder to tune into this week’s Financial Anarchists podcast.
In this week’s episode:
Former Markets and Money and Money for Life editor Nick Hubble joins the team in the studio…
The only thrill that can compare to investment markets…
What the Demographic of Doom is…and how long we have before it hits…
How your libertarian values look from the other side of the world…
Why the private sector is always a better option than giving governments control…
Until next week,
For Markets and Money