- Shop around
We often shop around to get the best deal when it comes to consumer items but the same should always apply to services we get. It’s a highly competitive world out there and service companies want to get and keep your business. So when getting a new service – whether it be for a power contract, phone plan, insurance or mortgage, or who to manage your super etc it makes sense to look around to find the best deal.
- Don’t take on too much debt
Debt is great, up to a point. It helps you have today what you would otherwise have to wait until tomorrow for. It enables you to spread the costs associated with long term assets like a home over the years you get the benefit of it; and it enables you to enhance your underlying investment returns. But as with everything you can have too much of a good thing – and that includes debt.
- Allow that interest rates go up and down
Of course, we have been given a rather rude reminder that interest rates can go up over the last year. But when things are going one way for a long time, as interest rates did when they fell from 2011 to 2020, it’s easy to forget that the cycle could turn. So, when you take on debt the key is to make sure you can afford higher interest payments at some point.
- Contact your bank if struggling with a mortgage
After the biggest surge in interest rates since the late 1980s, it’s understandable many may be worried about servicing their mortgage. However, homeowners struggling with a mortgage should not be shy in seeking assistance either to get a lower interest rate or maybe to switch to a different mortgage repayment arrangement.
- Seek advice regarding fixed versus variable rates
Australians have long struggled regarding how best to use fixed rates – often locking in at the top of the rate cycle and then staying variable at the bottom. As a general principle locking in low fixed rates makes sense when the rate cycle has gone down but staying variable when rates have gone up. Of course, it’s still hard to time it and there is always a case to maintain some flexibility by keeping a portion of the loan variable to allow for windfalls that enable you to pay down your loan faster. The key is to seek advice.
- Allow for rainy days
Because the future is uncertain it always makes sense to have a financial buffer to cover us if things unexpectedly go badly. The rainy day could come as a result of higher interest rates, 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 3% rise in interest rates.
- Credit cards are great but they deserve respect
I love my credit cards. They provide free credit for up to around 6 weeks and they attract points that really mount up. So, it makes sense to put as much of my expenses as I can on them. But they charge usurious interest rates of around 20% if I get a cash advance or don’t pay the full balance by the due date. So never get a cash advance unless it’s an emergency and always pay by the due date.
- Use your mortgage for longer term debt
Credit cards are not for long term debt but your mortgage is. And partly because it’s secured by your house, mortgage rates are low compared to other borrowing rates. So, if you have any debt that may take longer than the due date on your credit card to pay off then it should be included as part of your mortgage if you have one.
- Start saving and investing early
If you want to build your wealth to get a deposit for a house or save for retirement the best way to do that is to take advantage of compound interest – where returns build on returns. Obviously, this works best with assets that provide high returns on average over long periods. But to make the most of it you have to start as early as possible.
- Plan for asset prices to go through rough patches
It’s well known that the share market goes through rough patches. The volatility seen in the share market is the price we pay for higher returns than most other asset classes over the long term. And while property prices will always be smoother than share prices because it’s not traded daily and so not as subject to very short term sentiment swings, history tells us that home prices do go down as well as up.
- See big financial events in their long-term context
Hearing that $70bn was wiped off the share market in a day or two sounds scary – but it tells you little about how much the market actually fell and you have only lost something if you sell out after the fall. The trick is to allow for periodic sharp falls in your investments and when they happen remind yourself that we have seen it all before and the market will most likely find a base and resume its long term rising trend.
- Know your risk tolerance
When embarking on your investing journey, it’s worth thinking about how you might respond if you found out that market movements had just wiped 20% off your investments. Try and match your investment strategy to your risk tolerance.
- Make the most of the Mum and Dad bank
The Australian housing boom that started in the mid-1990s has left housing very unaffordable for many. This has contributed to a big wealth transfer from Millennials to Baby Boomers and Gen Xers. For Millennials and Gen Z, if you can it makes sense to make the most of the “Mum and Dad bank” by staying at home with them as long as you can and using the cheap rent to get a foothold in the property market; or leaning on them for help with a deposit.
- Be wary of what you hear at parties
Back in 2021, Bitcoin was all the rage but its yet to prove its use value, beyond something to speculate in. Often when the crowd is dead set on some investment it’s best to stay away, particularly if you don’t understand it.
- There is no free lunch
When it comes to borrowing and investing there is no free lunch – if something looks too good to be true (whether it’s ultra low fees or interest rates or investment products claiming ultra high returns and low risk) then it probably is and it’s best to stay away.