BarefootInvestor: Don’t get distracted by losing interest

Interest rates may be eye-wateringly low, and they may get even lower. But the safety of a boring savings account is important in these times of uncertainty, and is better than the alternatives, writes the Barefoot Investor.

Barefoot Investor Scott Pape answers your money questions. Picture: Jason Edwards.

When I look at my bank balance these days, I have the same reaction as getting a COVID test up the schnozz: Eye-watering pain.

See, as a lifelong saver, it pains me to see the amount of interest I’m earning on my so-called ‘high interest online savings accounts’ is a tearful 1.5 per cent per year.

On a lazy 10 grand that’s a whopping $150 a year.

Ouch!

But I guess that’s better than nothing, right?

Actually it’s worse: after I pay tax on the interest, and then account for prices rising (inflation), I’m in the red.

Yep, the money I have in my savings account is guaranteed to lose me money.

And remember, that’s with me earning a (relatively) decent 1.5 per cent per year.

If you’re saving with one of the Big Four, you’re probably not even earning half that. According to comparison site Mozo, over the last six months banks have cut the interest on 1,479 savings accounts and term deposits. And they’re likely to keep cutting, with the Reserve Bank of Australia (RBA) considering another rate cut as early as next month.

When will it end?

The RBA has said that it expects rates will be low for the next three years. At least.

Pass me a hanky, Daddy’s got a nosebleed!

Yet don’t cry for me Argentina.

Of all the people who write to me, there are two groups I feel most sorry for:

young people saving for a house deposit, and retirees trying to live off term deposits. 

While they’re at opposite ends of the limbo stick of life, they both ask me the same question:

“Should I invest some of my savings in the sharemarket?”

You can see their logic. After all, the week after last the share market went up over 5 per cent.

In a week!

However, my answer is always the same: Never invest money in the share market that you’ll need — or think you may need — in the next five years.

It’s just too risky. Chances are you could lose a chunk of your money.

When you think of it that way, 1.5 per cent doesn’t sound so bad after all, right?

So keep your short-term cash in a boring savings account that’s covered by the government guarantee (up to $250,000).

Still, I know it sucks.

To deal with the post-traumatic stress of low rates, I’ve had to reframe the role that cash plays in my financial life.

What cash buys me most is peace of mind. It gives me options in a time of crisis.

And if there’s one thing we’ve learned in 2020, it’s that the world is a very unpredictable place.

And that’s the rub: interest rates are said to be at their lowest levels in 5,000 years (and remember the pharaohs didn’t even have AfterPay).

This is discouraging people from saving, and encouraging them to borrow up big and take risks. History tells me this will (eventually) end in tears.

Tread Your Own Path!

Treat yourself to a socially-distanced date night.

FEAR AND LOATHING IN LOCKDOWN

JANE WRITES: We need your help! We implemented the Barefoot strategy a few years ago and since then have paid off all our debt, amassed a healthy Mojo and will soon tick over $100,000 in shares.

The problem is – is this really it!? We are desperately unhappy.

We live in a tiny, affordable home because we do not want to be ‘postcode povvos’.

Our car is a bit Pete Murray (it’s seen better days).

And I’m getting sick of our card declining when we have blown our ‘Blow Bucket’ for the week.

We are hustling, but to where? Maybe COVID lockdown is getting the better of me, but we kind of want to enjoy our one precious life.

BAREFOOT REPLIES: I hear you, this lockdown has been rough.

As a result there are a lot of Victorians suffering with their mental health … and it shows up in the questions they send me.

Personally I’ve got it good: I’m in regional Victoria with (slightly) more freedom, living on a farm where I can do a three-hour walk and not see anyone, and I can work from home.

The toughest thing for me is that I haven’t had a haircut for five months.

My sheep have better bangs than me!

I can only imagine what it’s like for you being locked down in a cramped house, with kids homeschooling for months while you try to work from home, or waiting on welfare to be allowed back to work.

It would totally suck.

So let’s make it not suck so much by playing a game: I want you to imagine what 2020 would have been like for you before you read my book: Lots of credit card debt.

No emergency fund. No shares.

It’d be awful, right?

Instead, you two have single-handedly eliminated the number one stress that families have.

That’s bloody amazing!

Now we all suffer from what psychologists call ‘hedonic adaptation’, which is a fancy way of saying we get used to things quickly, and eventually feel no better than we did before.

(It’s as true for getting out of debt as it is for trading in Pete Murray’s car.)

Still, I’m all for doing a (socially distanced) Date Night (when it’s allowed) and coming up with a new and exciting plan: it could be a house, a holiday, whatever.

Everyone needs something to look forward to, and you guys have proven that you can nail your financial goals.

You are absolutely right, life is for the living!

HITTING THE JACKPOT

MELANIE WRITES: My hubby spends all his ‘Splurge’ account on Tattslotto.

And not just here and there — his account statements are littered with Tattslotto purchases.
I think this is unhealthy but he is using his Splurge for it, which I guess shows a level of control.

Am I just worried about nothing or is this something we should take seriously?

I don’t want to be financially controlling, but it doesn’t feel right.

BAREFOOT REPLIES: What a great question!

Here’s a better one I’d ask him: What could he spend his Splurge money on that would give him the best bang for his buck?

After all, he’s got a 1-in-140 million chance of winning the jackpot … but if he saved up his money and splurged on a romantic night away with you (without the kidlets) … well, I’ll leave it up to you to explain his odds of hitting the jackpot.

And while you’re having a nice romantic dinner, you could do a Barefoot Date Night, review your buckets, and plan on doing more things that’ll make you both smile.

Swapping a lotto ticket for a date night may be a more productive use of money.

THE NAME OF YOUR BOOK IS WRONG

MAYANKA WRITES: I came to Australia four years ago with hopes of a better life for my family.

We knew no one and had just $8,000 dollars – that was a stressful time.

Then I stumbled across your audio-book.

Fast forward four years: I have three months of Mojo and we recently bought our home with a 20 per cent deposit. I have increased my income by 33 per cent and am due for another promotion.

I have even started volunteering, following your advice – we do laundry for homeless people. I live a much happier life thanks to your book.

You call it a money guide – wrong!

BAREFOOT REPLIES:

Thank you so much for writing.

I get thousands of people who write to me all jazzed up straight after they’ve finished the book.

Yet what’s cool is that now, four years since the book came out, I’ve been getting emails from people like you who’ve used it to make some amazing gains.

Congratulations on making your way in the best country on earth. You got this!

Originally published as BarefootInvestor: Don’t get distracted by losing interest