Barefoot Investor: Why I’m not the cheering the RBA’s latest rate cut
Anyone who’s celebrating the latest rate cut is missing the point. Having to cut rates to the lowest in history — with the promise of even more to come — is a sign that we’re in deep trouble, writes the Barefoot Investor.
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My five-year-old son is obsessed with maths.
The other night he worked out that the maths app game we play each night is charging us a recurring fee.
He was indignant: “You need to delete this game off the iPad, or we’ll keep getting billed. Do you understand, Dad?”
I nodded.
Chip off the old block.
Anyway, it wouldn’t surprise me if he eventually studies finance at university.
And if he does, he’ll almost certainly (as part of his “financial history” class) look back at this monetary madness we’re living through in 2019.
I picture him coming back to the farm, scratching his head: “Dad, what the hell were you guys thinking?
“The housing market was slowly deflating after the mother of all housing booms … but then you started cutting interest rates to almost zero?
“And at the same time you loosened lending criteria and encouraged young people to buy a home with just a 5 per cent deposit?
“How did you think it would end?!”
OK, so I’m putting it on record that I don’t think any of this is a good idea.
Yet I’m clearly in the minority: this week the media predictably cheered that the average homeowner would be $58 a month better off with the latest rate cut.
They’re missing the point.
Having to cut rates to the lowest in history — with the promise of even more to come — is a sign that we’re in deep trouble.
Rate cuts are supposed to act like cocaine … yet after this many hits, their effectiveness is wearing off. (The Verve sang it best: “Now the drugs don’t work, they just make you worse.”)
Just like I can’t fathom my father paying 20 per cent interest on his home loan in the early ’90s, I’m sure my son will be baffled by our rock bottom rates today. Either way, this is a massive financial experiment that we’ve all signed up to … and the effect could be felt for generations.
Tread Your Own Path!
Q&A
A HOLIDAY THAT MIGHT NOT END WELL FOR BROTHER
DANIELLE ASKS: My socially irresponsible 34-year-old brother recently spent four weeks in Thailand and met an attractive masseuse who seems to have made him believe he is the man of her dreams.
They spent the entire time together, and now that he is home in Australia we hear she is expecting their baby!
He is paying the mortgage down on his own property, has a secure job, and will soon receive a substantial inheritance from a relative (who would be mortified at this situation).
I feel he is being scammed.
If there is a baby on the way, I think this is exactly what this lady intended.
Yet he wants to believe all the lies he has been fed, and of course she now wishes to set up life here in Melbourne.
Most of our family agree he should send money to support this child and visit a few times a year.
But I fear he will bring her over here, and I am not sure it will end well. What are your thoughts, and how can he protect his interests?
BAREFOOT REPLIES: That’s a hell of a story … and a complicated question: how can your brother protect his interests?
Well, that presupposes that he actually wants his interests protected.
He’s a grown man. He’s in love. And he’s going to be a father for the first time. So I’m not sure how far you’ll get telling him that the mother of his unborn child is a scammer.
(Look, I have no tuktuk in the race: he may be getting scammed. It wouldn’t be the first time something like this has happened. Or she may turn out to be the love of his life. Who knows?)
If I were in your shoes, I would do three things:
First, let him know that he’s your brother and you’ll support him.
Second, encourage him to get DNA tests to ensure the baby is his (as legal counsel Kanye West says: “Eighteen years … eighteen years … and on her eighteenth birthday he found out it wasn’t his?”).
Third, encourage him to get proper legal advice: investigate having the inheritance diverted into a discretionary trust (of which he’s a beneficiary), set up a testamentary trust (estate planning), and, finally, if the relationship goes ahead, get a binding financial agreement (BFA) which sets out what happens in the event of a separation.
Good luck.
DON’T DRIVE BACK DOWN THE ROAD TO DEBTVILLE
JESS ASKS: My husband and I are two months away from finally clearing nearly $100,000 of card debt we racked up some years ago.
Now we are about to start a family and want to buy a new Mazda CX-5.
We are thinking of doing this through salary sacrificing, which would cost us a fortnightly fee including all on-road costs. However, we are nervous about getting caught up in long-term debt again.
Is salary sacrificing a safe option for getting a car?
BAREFOOT REPLIES:
Are you freaking crazy?
No, you should not borrow to buy a brand new $40,000 car.
You’re like an alcoholic who celebrates their sobriety with a Jager Bomb!
The only thing you should be salary sacrificing is superannuation (after you’ve saved up a deposit and bought your first home — Barefoot Step 4).
You have two months till you pay off all your debts.
After that, save up and buy the cheapest, safest second-hand car your ego can afford.
You’re doing great, don’t blow it!
SOON YOU COULD JUST SUBSCRIBE FOR A CAR
SARAH ASKS: I homeschool my 11- and 13-year-old girls.
This week, after reading your letter to Sally (the teacher with car loan issues), I decided to ditch my maths lesson for the day and teach your “car finance” lesson.
It was such an eye-opener for my girls and a truly great life lesson. They were gobsmacked by the repayment amounts!
The lesson has inspired them to teach everyone else in our extended family about the consequences of buying a car with credit. Thank you for the work you do.
BAREFOOT REPLIES: As the question above shows, cars are very seductive!
And that’s why I love the fact that you’re taking your daughters through this lesson.
It is kind of frightening to add up all the costs of owning a car that is parked 95 per cent of the time!
That’s why cars are going the way of Netflix — being offered for a monthly subscription.
MORE: WHY NOW IS THE TIME TO MAKE A HOME RUN
In the US last week Hertz launched a car subscription service. For $US1000 a month you get a new car, full maintenance, roadside assistance and insurance (and there’s no ongoing commitment, so you can take it up in December, ditch it in January, and not have any of the ongoing costs).
And it’s not just car rental companies: Volvo launched a subscription service at $600 a month that went berserk, and Mercedes-Benz, BMW, Audi, Porsche are all planning something similar.
Will this be a good deal for drivers? Time will tell. Then again, if Uber has its way, no one will drive at all!
Why all that glitters is not gold
The price of gold may be on the rise but it’s not quite as shiny as it seems. When it comes to long-term gain, it pays to follow the golden rule — only invest in things that regularly put money back in your pocket, writes the Barefoot Investor.
Don’t get high on the short-term sugar hit
Despite the COVID crisis, money questions have been flooding in from readers about how to buy and trade stocks, or even gold. Maybe it’s down to raiding super, or the government stimulus, but the key to financial control is first to get out of debt, writes the Barefoot Investor.