(03) 9020 2905Call it Tron, call it Narnia, call it Wayne’s World if you want. But for sure, last week we entered an economic dimension none of us have ever actually been to before.
Official interest rates below 3 per cent. They haven’t been there for 53 years.
Only those aged 70 or over, who had a mortgage that pre-dated the Hippy movement and still has one now, knows this alternate universe.
(And, as a financial adviser, I’m officially licensed to inform you that if you still have your mortgage from 50-odd years ago, you’re doing it wrong. Very wrong! The whole thing.)
Anyone who cheered, high-fived the lunch-room, hummed a few bars of Coles’ “Down, down, prices are down” slogan, or cracked some champagne last Tuesday … you simply don’t get it.
This is bad news.
On a scale of zero to 10 – zero being Roseanne Barr and 10 being Bo Derek (of course) – this is Ugly Betty.
For the non-believers, let me take as you a few quick questions.
What do the US, Canada, Japan, Switzerland, Hong Kong, the Eurozone and Britain have in common?
Official interest rates at, or below, 1 per cent.
And where are their economies heading?
Destination: Outhouse. Actually, most of them are through the S-bend and are floating away to the local sewerage farm.
These are not economies whose fortunes we want to replicate. But our interest rates are heading in their direction, out of similar fears from RBA Guv’nor Glenn Stevens.
Celebrations of this rate cut were for the economically and financially illiterate. Others might have got a chill down their spine.
Interest rates at 2.75 per cent means the Reserve Bank believes we’re in as deep trouble as we’ve been in for, officially, yonks. And Guv’nor Stevens does not want to be The Man In Charge when the economy goes into reverse hyperspace.
I think the Guv was hiding something in his statement last week. It’s possible he’s playing the in-control captain of the ship, trying to keep everyone calm.
But he’s been on the bridge. And he can see an iceberg. He’s changed course, without trying to panic everyone.
Have you ever read the RBA’s monthly interest rate decision press release (available at www.rba.gov.au )?
Let’s ignore the stuff about international economics, commodity prices, blah, blah, and focus on you and me as punters. In 40 words or less, here’s what they’re saying about YOU.
“More of you want jobs, but can’t get them. Share market’s going well, but you’re too scared to buy houses or borrow more money. What have we got to do to get you to spend some savings, you tightwads?”
So, if you’ve got a $300,000, 25-year, mortgage, the RBA has handed you another $45 a month, on top of the $315 a month they’ve handed back in the last 18 months. (Well, nearly, lenders kept some of that for themselves.)
Many people have, and will, blow that $360 a month. Money slips through the hands of some people. Let them help the economy by spending money.
Smart people help themselves first. If the Guv is right and this economy is heading down the same gurgler that Europe and North America were sucked down, then your responsibility is to your own personal financial survival.
Moat your fort first. When you’ve secured your own fortunes, then you can consider, maybe, helping out the country.
And how do you do that? Continue on as you have been. Those with the deepest pockets will get through an economic crisis if it’s just around the corner. Here are the five things smart people have been doing.
- Bank the rate cut. That is, use it to get ahead on payments, or build up your savings buffer.
- Cut spending. Try to match that $45 rate cut with savings in spending.
- Don’t load up on consumer and credit card debt.
- Put in the extra effort at work (to secure your job).
- Invest. Those who diverted savings to investment over the last 12 months have reaped the rewards. And, in any case, you’ve got to have an ongoing investment plan.
And if, in the coming months, we get more rate cuts, be wary. This new dimension is unchartered territory.
Bruce Brammall is the author of Debt Man Walking (www.debtman.com.au), a licensed financial adviser and mortgage broker. bruce@debtman.com.au.