Scott Pape: Relax, interest rates are still incredibly low

The Reserve Bank ‘shocked the market’ with its biggest hike in 22 years but interest rates, compared to the 1990s, are still incredibly low.

Scott Pape is The Barefoot Investor.

One of the more excruciating appointments of my week is under-eights tennis on a Tuesday night.

“Stop swinging those tennis racquets around, you two galah’s … someone will get hurt”, I scolded my son and his mate from the sidelines.

And then … WHACK!

My son copped a backhand from his mate. Right on the schnozz. He started screaming hysterically, so I rushed over. “Gimme a look”, I said, trying to prise his hands away from his face.

He looked at me, terrified, and yelped:

“Is there blood, Dad?!”

(There was blood.)

And earlier in the afternoon there was also some blood spilt … when the Reserve Bank “shocked the market” with its biggest hike in 22 years, lifting rates a full half of one per cent.

In the news game, if it bleeds it leads, and this was a double gusher!

But was this really a “shock”?

Hardly.

I mean, if you zoom out, interest rates are still incredibly low.

After all, in January 1990 the cash rate was 17.5%, and it’s now … wait for it … 0.85%.

Even across the ditch in New Zealand their rate is already 2%!

Look, I’m not saying there isn’t genuine hurt out there. As a financial counsellor, I know. Yet this obsession the media has with catastrophising every rate rise is just ridiculous.

What’s really happening is that the Reserve Bank is ever-so-gently peeling off the easy-money bandaid — and the media is like a wimpy kid screaming with every millimetre: “It hurts!”

Speaking of which … what happened to my son?

Well, it was a tense situation. If I admitted to him that there was (a tiny bit of) blood, he’d have gone full Nick Kyrgios on me. So, instead, I calmly licked my thumb, smudged the blood, looked deep into his eyes and said, “She’ll be right, mate, it’s as good as gold”.

And guess what?

It was.

Tread Your Own Path!

Pay Up, Or I’ll Knee Cap You

Hi Scott,

My relative has called asking for a very sizeable loan. They got in deep water with a loan shark (not the one with a financial services licence type, one with threats of violence coming) and have no other avenues to turn to.

What do I do? I have some savings so could partially help out, but who knows how long this saga would go on and I’d only be furthering a criminal enterprise. I have my own family with young kids to look after too. Help!

Sarah

If you are being chased for money by a loan shark, you should contact a financial counsellor.

Hi Sarah,

What caused them to be in this situation won’t be solved by your money.

It could be drugs, gambling, mental illness, or garden variety greed and stupidity.

Regardless, this is not your battle.

So here’s what I want you to do instead: tell your relative to call 1 800 007 007 and book an appointment with a financial counsellor like me. Not only are we used to dealing with loan sharks, we’re also experts in referring people to support services – be that the police, gambling support, or mental health counsellors.

That’s all you can do, and it’s all you should do.

Crazy in Adelaide

Scott,

With the housing market gone crazy here in Adelaide, my 70-year-old dad would like to help us three kids out so we can all be in the market.

My sister and I already have a house and mortgage, but our brother doesn’t.

Dad has a modest property (no house), worth around $400,000, which has sat empty for years. He purchased the property in 1988. He would like to give the property to my brother and have my brother pay me and my sister a third each (i.e. $133,000 each).

Is there a way my dad can do this without being punished with capital gains tax? It seems unfair he would be penalised for trying to help out his kids in a very tough market.

Gretta

Hi Gretta

Your father isn’t being punished! He made his money by basically land banking, so I don’t think it’s unfair that he pays some tax.

What’s really got your goat is that the taxman is going to take a chunk out of your gift. Either way, it’s probably easier for your dad (not your brother) to sell, pay the tax, and give whatever is left over to his lucky kids.

So I Won a Radio Competition …

Hi Scott,

Recently I won a financial review on a radio show. I went along and had a chat, and they did a financial health check. They offered simple suggestions, such as increasing my pre-tax super contributions. Then they prepared a comprehensive plan. If I run with the plan, the fees are $3,000 + 1.5% p.a. of my portfolio.

If I adopt all the strategies, the $3,000 is dropped to $1,500. I have a very large super balance in a State Government fund that is closed to new members but still functioning. The fund is performing pretty well and has low fees. I’m worried the adviser’s fees will reduce my returns. Is this correct?

Be wary if you ‘win’ a financial health check.

Doug

Hi Doug,

I don’t think you won the prize on the radio – I think you were the prize.

You’re probably thinking to yourself that you’re halfway down the garden path with these guys. You’re up for $3,000, so why not move everything over to them and save yourself $1,500? “Because they suck, and you don’t want to have anything to do with them”, would be my thoughts.

Doug, they’re suggesting you switch from your low-cost super fund to their higher fee funds. Is that for your benefit, or theirs?

The cost of switching could be an extra $3,000 every single year.

My suggestion?

Call your boring old State Government fund and ask to see one of their financial advisers. The first hour will be free. Show them the plan these winners have made for you and get them to size it up.

You Helped Me Save Myself

Scott,

I bought your book five years ago. I’d lost my beautiful wife, Moira, to breast cancer. We’d spent every cent we owned (and then some) trying to save her. I had no idea how to get out of the hole we were in. I was 50 years old with five children and in debt up to my … neck. I owed the ATO $20,000+ which I’d used for medical bills, and my savings were zero. At rock bottom, I had $50 in the bank on a Friday and had to stretch it to the following Thursday while collecting cans and bottles to feed the family.

Now, with the help of your book and hard work, I’ve paid off the ATO debt, I’ve $15,000 saved, and I’m in a position to invest and move forward. I left my old job two years ago and started my own maintenance and construction business, which has been very successful. I’m banking 20% of my wage into super and it’s growing. For the first time in seven years, I can breathe a little easier and get a good night’s sleep. You have no idea how you have impacted me and my family’s life. Bless you, mate!

Doug

Hey Doug,

What an amazing story.

Your back was to the wall and you fought your way out.

One tip: tell and retell your story as much as you can to your kids.

This has become part of your family legacy: you guys don’t quit, no matter what. Moira will be looking down and cheering you on. You did good, Doug.

You Got This!

Information and opinions provided in this column are general in nature and have been prepared for educational purposes only. Always seek personal financial advice tailored to your specific needs before making financial and investment decisions

The Barefoot Investor for Families: The Only Kids’ Money Guide You’ll Ever Need

(HarperCollins) RRP $29.99

If you have a money question, email [e-mail].

Originally published as Scott Pape: Relax, interest rates are still incredibly low