Rising interest rates may seem like a burden for Australians, particularly those who are paying off a large mortgage. The thing to remember is that whilst the family picnic may be ruined by wet weather, the farmers love the rain! More rain will eventually mean more food and more picnics later on.
Examples of people who may be affected positively by interest rate rises are investors, particularly self-funded retirees or those who are about to retire (such as the "Baby Boomers"). These people will now be receiving a higher income which means that they can spend more money on new goods and services; possibly in your workplace.
Yes, the average home-owner with a mortgage will have to spend more money on their bank loan, but this will have a flow-on effect in the greater economy. Consider that without an interest rate rise, the economy may overheat, which causes further job losses. A higher interest rate can be a good thing if your homeloan costs more but you do get to keep your job!
At present, interest rates are at record lows in the UK and the USA (below 1%). We will look more at why this is in “Interest Rates Part Two: how to make $50 000 for nothing”. These economies are suffering badly and job losses are at record highs. The economies in Australia and China are weathering the economic storms more strongly, and both countries have just raised their interest rates.
International investors are strongly attracted to Australia with its stronger dollar, more secure economy and higher rates of return on investment. Investors are attracted to China for similar reasons. Investors’ money is rapidly leaving the USA & UK (earning 1% interest) and flooding to Australia and China to be invested at 5% or greater. This international investment means more jobs, even if the mortgages are going up.
Whilst mortgage rates may be high for the foreseeable future, homeowners are advised to cut back on unnecessary expenditure, such as cable TV, cigarettes, alcohol, work lunches or anything that is not essential or anything does not MAKE you money or SAVE you money. Ensure you do essential maintenance on the car but hold off on the new in-dash DVD player.
Consider doing an imaginary cashflow projection based on a 10% mortgage; you will soon see areas where you can cut back. You can pay 10% payments off the mortgage anyway; this will put you in front on the loan, impress the banks and be good insulation if anything unexpected should occur.
Next article: How to make $50 000 for nothing & Higher interest rates just like 1992: where to invest for the best returns beyond 2015.
Showing posts with label interest rates. Show all posts
Showing posts with label interest rates. Show all posts
Thursday, November 04, 2010
Monday, October 25, 2010
Saving versus Investing: what's the difference?
Banks can be good: if you own them
Saving versus Investing: what's the difference?
Many well-meaning people, including parents, teachers and financial advisers, tell you to save.
"Just save," they say, without telling you where or how or why. "Save 10% of your money and you'll be rich one day."
It sounds like good advice. Is it? The question is, did THEY follow it? Did they save? Are they rich? Does it work?
Many would be tempted to say “no”. Trying to save is hard. For a start, you have to go without things you can see in order to get something you cannot see. For example, at the age of sixteen and working your first job, you may have had the choice to go without a new stereo in order to "be rich someday". Forget it: most bought the stereo that they could see.
In addition, saving does not give you leverage. It is sort of like trying to pick up your fat aunt and lift her off the ground. It is slow, sweaty, and not very glamorous. Using leverage, you could put your fat aunt onto a seesaw and use a fulcrum to lift her up. It looks so easy once you know how.
“Saving Cash” can waste your time, and your money!
Saving money into a standard bank account (back when the bank didn't charge you fees to lend them money) took a long time.
Imagine putting a crisp $10 note into the bank back in 1990. Wow, that was a lot of money, back then. Ten dollars in 1990 was the price of two student movie tickets, or four hour's work flipping burgers at McDonalds.
Fast forward to today, and the same crisp ten dollar note would be slightly larger. Ignoring the applicable bank fees, without allowing for taxes, and just counting interest, you would now have about $15. Nowadays that does NOT get you two student movie tickets, and is NOT enough to pay someone for four McHour's work...
What has happened is that inflation has traveled faster than bank interest. Although your money appears to have grown, the purchasing power of the money has shrunk.
[For more lessons on inflation, read Chapter Two of “Who’s taking Your Money?” or check the internet or library. In 1930’s Germany, workers were paid twice a day due to rapid inflation. In Zimbabwe in 2009, workers were paid in petrol due to the “zimbillions”…]
Banks can be good: if you own them
Imagine now, that when you walked into the bank back in 1990, and instead of saving into a bank account, you handed your $10 to the manager and said "Hey buddy, I want to buy some shares in your bank."
Depending upon the bank that you walked into, you may have received one Commonwealth Bank share, two of the National, five of the Westpac and so on (find out what the 1990 share price was for YOUR bank).
Fast forward again to the present and see what your $10 would be now worth. Before you do the quick math and say a figure of between $40 and $100, remember that bank shares do not just GROW in price, they also pay you income each year.
This means that your seedling $10 which you planted did not just grow into a bigger tree, it also produced fruit. Depending upon whether you picked the fruit or let it drop to seed and grow more trees, you may have far more than $100 accumulated.
If your $10 bank share investment was now worth $100+, you will find that you have more than enough money to take half a dozen students out for a movie, and possibly a beverage as well, or enough to pay a McSoldier for two whole days of flipping burgers...
What has happened here? Why is your money so much more? The amount has grown substantially, exponentially. You have become an Investor, not just a Saver. When you save, you lend the bank money. When you invest, you OWN the bank.
In the last twenty years or so, interest rates have come down from 15% on cash to around 5%. And yet the bank still makes massive profits. In 1992, a Westpac bank share would have cost you around $2, and you would have received around 15 cents in income (dividend or "share rent"). In 2010, the same share would be worth $25, and you would receive around $1 in income. This income, of course, increases steadily each year.
Safe as Houses? More Profitable!
To put the above investment into (a strange) perspective, imagine buying a house in 1992 for $20,000 and renting it out for $30 per week. In 2010, the same house would be valued at $180 000, and paying you $200 per week...
For a start, there are not too many houses which you can buy for $180 000 that return $200 per week. Certainly there are very few houses that have had such dramatic growth on their value and their income.
It would be a challenge for you to find a house that could rival the shares for ongoing costs… The difference between the two is, having to spend absolutely nothing on maintenance, insurance, rates etc.
Why do we love Australian shares?
Because, deep down, we are lazy.
We do not want to paint our investment, mow its lawn, collect its rent, pay its rates, advertise and interview tenants, and we certainly do not want to go to the trouble of paying taxes on its income every year... And if we ever decide to sell it, we do not want to have to hammer a sign into the ground, call multiple agents and then put coffee on as hundreds of hopefuls traipse through it and look at it...
We want our investment to sit quietly and grow, paying income that is tax-paid, having no maintenance, no ongoing costs, and not taking up too much room. We want to be able to sell it in a day with one phone-call, or take it with us when we move. Easy!
Lazy Investors of the world, unite!
You can “own the bank” by buying shares in your preferred bank, starting with as little as $500. For more information, go to www.24hourwealthcoach.com & click on “Open an Investment account”, call 1300 762 624 or buzz your favourite broker.
Saving versus Investing: what's the difference?
Many well-meaning people, including parents, teachers and financial advisers, tell you to save.
"Just save," they say, without telling you where or how or why. "Save 10% of your money and you'll be rich one day."
It sounds like good advice. Is it? The question is, did THEY follow it? Did they save? Are they rich? Does it work?
Many would be tempted to say “no”. Trying to save is hard. For a start, you have to go without things you can see in order to get something you cannot see. For example, at the age of sixteen and working your first job, you may have had the choice to go without a new stereo in order to "be rich someday". Forget it: most bought the stereo that they could see.
In addition, saving does not give you leverage. It is sort of like trying to pick up your fat aunt and lift her off the ground. It is slow, sweaty, and not very glamorous. Using leverage, you could put your fat aunt onto a seesaw and use a fulcrum to lift her up. It looks so easy once you know how.
“Saving Cash” can waste your time, and your money!
Saving money into a standard bank account (back when the bank didn't charge you fees to lend them money) took a long time.
Imagine putting a crisp $10 note into the bank back in 1990. Wow, that was a lot of money, back then. Ten dollars in 1990 was the price of two student movie tickets, or four hour's work flipping burgers at McDonalds.
Fast forward to today, and the same crisp ten dollar note would be slightly larger. Ignoring the applicable bank fees, without allowing for taxes, and just counting interest, you would now have about $15. Nowadays that does NOT get you two student movie tickets, and is NOT enough to pay someone for four McHour's work...
What has happened is that inflation has traveled faster than bank interest. Although your money appears to have grown, the purchasing power of the money has shrunk.
[For more lessons on inflation, read Chapter Two of “Who’s taking Your Money?” or check the internet or library. In 1930’s Germany, workers were paid twice a day due to rapid inflation. In Zimbabwe in 2009, workers were paid in petrol due to the “zimbillions”…]
Banks can be good: if you own them
Imagine now, that when you walked into the bank back in 1990, and instead of saving into a bank account, you handed your $10 to the manager and said "Hey buddy, I want to buy some shares in your bank."
Depending upon the bank that you walked into, you may have received one Commonwealth Bank share, two of the National, five of the Westpac and so on (find out what the 1990 share price was for YOUR bank).
Fast forward again to the present and see what your $10 would be now worth. Before you do the quick math and say a figure of between $40 and $100, remember that bank shares do not just GROW in price, they also pay you income each year.
This means that your seedling $10 which you planted did not just grow into a bigger tree, it also produced fruit. Depending upon whether you picked the fruit or let it drop to seed and grow more trees, you may have far more than $100 accumulated.
If your $10 bank share investment was now worth $100+, you will find that you have more than enough money to take half a dozen students out for a movie, and possibly a beverage as well, or enough to pay a McSoldier for two whole days of flipping burgers...
What has happened here? Why is your money so much more? The amount has grown substantially, exponentially. You have become an Investor, not just a Saver. When you save, you lend the bank money. When you invest, you OWN the bank.
In the last twenty years or so, interest rates have come down from 15% on cash to around 5%. And yet the bank still makes massive profits. In 1992, a Westpac bank share would have cost you around $2, and you would have received around 15 cents in income (dividend or "share rent"). In 2010, the same share would be worth $25, and you would receive around $1 in income. This income, of course, increases steadily each year.
Safe as Houses? More Profitable!
To put the above investment into (a strange) perspective, imagine buying a house in 1992 for $20,000 and renting it out for $30 per week. In 2010, the same house would be valued at $180 000, and paying you $200 per week...
For a start, there are not too many houses which you can buy for $180 000 that return $200 per week. Certainly there are very few houses that have had such dramatic growth on their value and their income.
It would be a challenge for you to find a house that could rival the shares for ongoing costs… The difference between the two is, having to spend absolutely nothing on maintenance, insurance, rates etc.
Why do we love Australian shares?
Because, deep down, we are lazy.
We do not want to paint our investment, mow its lawn, collect its rent, pay its rates, advertise and interview tenants, and we certainly do not want to go to the trouble of paying taxes on its income every year... And if we ever decide to sell it, we do not want to have to hammer a sign into the ground, call multiple agents and then put coffee on as hundreds of hopefuls traipse through it and look at it...
We want our investment to sit quietly and grow, paying income that is tax-paid, having no maintenance, no ongoing costs, and not taking up too much room. We want to be able to sell it in a day with one phone-call, or take it with us when we move. Easy!
Lazy Investors of the world, unite!
You can “own the bank” by buying shares in your preferred bank, starting with as little as $500. For more information, go to www.24hourwealthcoach.com & click on “Open an Investment account”, call 1300 762 624 or buzz your favourite broker.
This article was part-published in PROPERTY section of Ipswich "City News" October 2010 & is reproduced here in its unedited entirety. http://www.defencenews.com.au/inbrowser.aspx?id=16
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