Interest rates are coming down, down, down
What’s worth talking about
Interest rates are coming down and this has both positive and negative implications for us all:
- The happiest people are probably those who have a mortgage, as they will have noticed that their monthly repayments have reduced. We recently sent out some advice on what those in this camp should be doing with their extra cash flow – the most important thing is… don’t spend it!
- The unhappier people will be the ones who don’t have a loan, but do have savings in the bank, they will have noticed that they are receiving less in interest income each month.
Why is the Reserve Bank (RBA) lowering interest rates?
Well, basically it is because they are scared about the future growth and competitiveness of Australia, and they want to try to stimulate the economy and promote growth.
With Australia having much higher interest rates than the rest of the world, it is encouraging people to move money from their own country (where they may be earning very little interest, or in some countries even having to pay money to have it in the bank – yes this has actually occurred in the USA and now Switzerland!) and invest it in Australia where they can be earning an extra 3-4% with the same level of risk.
With more people buying Australian dollars (AUD) , this pushes up the value of the AUD versus other currencies, (this is called the carry trade). Now for people like me, who love to travel and purchase things online from overseas, this is great as the rest of the world seems cheap to us.
The problem for Australia though, is that we are now really expensive to the rest of the world so less people buy globally are buying our products, services and commodities, which means less revenue for our economy and ultimately resulting in less economic growth.
The other problem with high-interest rates is that it costs more to borrow money. This means businesses borrow less and therefore grow less.
People also borrow less, to invest in property and shares, which also results in less demand growth.
Essentially, lower interest rates will mean that people will be forced to move some of their cash into riskier assets in order to get their required income and growth.
This has already started, as you may have seen through the recent strong performance of the share market. Currently, there are still record amounts of cash being held, so expect this trend to continue.
It will also mean that people will be able to borrow more at a cheaper rate, which will encourage people to borrow to purchase property and businesses might look to acquire other businesses.
Mr Kelly’s classroom – why would you borrow to invest?
The main reason to borrow to invest is to gain greater exposure to an investment asset so that if it goes up in value, you will benefit more from the gain.
Now, it is important to distinguish between borrowing to invest and borrowing to buy something because you want it today and you don’t have enough money to pay for it.
The classic example of this is a car loan. It is never acceptable to borrow money for a car.
You do not have the right to own a car that you cannot afford to buy. Cars are a depreciating asset. Meaning, you’re paying interest on a loan for something that is only going down in value.
(NOTE: There may be some situations where salary sacrifice, lease arrangements or buying through your business may be beneficial. However in most instances having the money up front for your new car, is by far the best option).
The other example which is often confused, is to buy a property that you want to live in. This is generally not an investment even if you keep telling yourself that it is!
Why do I have this view? From observing people’s constant desire to keep making changes to their home, trying to make it more comfortable. This is a constant financial drain. Plus, unfortunately, most of these changes don’t result in an improvement of the value of the property.
What I have learnt from you
We can’t help you if you don’t take our advice!
At Wealth Enhancers we have one major requirement for anyone who wants us to help them on their journey to financial freedom – you want to achieve more! In order to achieve more you can’t just be told how to do it. You actually need to act on it as well. We need our clients to follow our advice, in order to get the results they want.
Of course, it is always important to question why you should do something. But we sometimes find people get so obsessed with the minor details that they hinder themselves from taking the necessary action in order to get started on a path of self-improvement.
A classic analogy is people trying to get fit or lose weight.
The best thing you can do is to start exercising a little more. You can start cutting out some of the bad food in your diet. Once you get started it is a lot easier to fine tune along the way.
With our clients, we are entering into a long and constantly changing journey. There is no way we can forecast exactly what is going to happen in the future.
The most important thing is to get started. Allow us to guide you through the best course of action at every road bump that might come up.
Need some help with taking advice? Our Financial Coaches LOVE helping members with their goals and working out how to attach money to them. To chat goals with one of the WE team, book in a time for a Free Strategy Session.
Disclaimer: Information contained within this article is of a general nature. Do not be rely upon it when making financial decisions. Please consult a professional financial advisor or planner (like us!) before acting.