Best laid plans
Published in Australian Women's Health, February/March 2009 by Hanna Marton
Credit corner. Economic downturn. Sub-prime. They're words that have replaced "he did this thing with his tongue" and "it's a Jamie Oliver recipe" in dinner-party conversation.
Babies` first words are increasingly "bail-out" and "Footsie".
Friends are losing jobs, parents are installing retirement and P Diddy now flies on commercial airlines.
The economic crisis is a wake-up call for women, who are typically not confident with money, reckons financial adviser Joan Baker.
'We retire on 75 per cent less savings than men" says Baker, author of A Man is Not a Financial Plan ($24-95, Allen & Unwin).
One possible reason? Almost a quarter of women were not taught by their parents to be financially prudent, according to research by Citibank.
This leaves them hoping for a windfall, explains Baker: love (a knight in shining Armani); a lotto win; or a legacy (inheritance).
But understanding money isn't hard. And despite popular belief, having more of it can make you happier, because money woes equal stress.
But first, let's stem with a lowdown on the economic crisis.
So, the GFC? Let's start at the very beginning. Between 2004 and 2005, US banks amped up sub-prime lending.
Sub-prime mortgages are low-quality home loans, requiring little or no deposit, given to borrowers who basically can't afford the repayments.
Some borrowers had bad credit ratings, some had no job at all.
It was wrongly assumed that house prices always go up and the homeowners would be able to refinance their houses and/or sell later at a profit.
Meanwhile. U S banks bundled these bad loans into "securities" and sold them to investors (such as super funds and insurance companies), in case the borrowers didn't make the repayments.
The investors bought the securities, believing the dodgy loans would be less risky if they were bundled together. Uh, that would be a no.
The new home loans led to more new houses being built across the US, driving supply to a level that exceeded demand.
So house prices fell and borrowers owed more to the bank than their houses were worth.
The banks couldn't recover 100 per cent of the loan by selling the house: they lost money.
And because investors had bought these securities, they too lost money.
Paranoia ensued. Suddenly, no one was lending to anyone in case they didn't get paid back.
But most businesses rely on debt to survive. The US stock market fell, eating into everyone's super (because super funds invest in the stock market), while homeowners saw the value of their houses falling.
Everyone felt poorer and spent less. American retailers’ sales dropped so they retrenched staff.
Laid off employees, stopped spending money, and defaulted on their home loans. "Downward spiral" is an understatement. The UK economy went next.
So, what's this got to do with Australia?
It’s simple: our financial institutions rely on the global market to give them money, explains Phil Naylor, CFO of the Mortgage and Finance Association of Australia.
"While the high quality securitised loans in Australia are nothing like the sub-prime ones in the US, American investors didn't want to buy our debts either.
Banks get all their funds from securitised products” he says.
If Oz had a self-contained economy and didn’t do business with other countries, our economy would be fine to today.
But we've been pulled under the waves by a drowning America.
So, this is where we’re at now: we’re caught in rip, but governments are throwing out life jackets.
Financial institutions are getting bail-outs to keep them afloat, but this is controversial - bail-outs are often paid for with tax dollars.
On September 7 last year, for example, the US government took over mortgage giants Freddie Mac and Fannie Mae, handballing $US5 trillion of the country's outstanding home mortgage debt to the taxpayer Ouch.
Here, the Rudd Government set up 2 billion fund (funded by the big banks and underwritten by a Government debt guarantee) to help car dealers.
It's not just big business getting hand-outs, though.
The Government dished out $10.4 billion (using the budget surplus) to ordinary Aussies last Christmas, an "economic stimulus package" designed to, well, stimulate the economy by getting people to spend more.
The Government's also trying to fix our growing unemployment rate: 4.4 per cent at the time of writing (thousands of jobs have been slashed at companies like Sony.
Fairfax, Volvo and the Salvation Army) but tipped to reach anywhere from six to nine per cent by the end of the year.
K-Rudd is injecting $4.7 billion (also from the budget surplus) into the country's infrastructure (transport, education and roads), which he hopes will create 32,000 new jobs.
The Reserve Bank has cut interest rates, with the aim of making it cheaper for people to repay loans.
Though this means a cut to the interest you can earn on savings.
The economic crisis is an excellent lesson for 20- and 30-somethings, says Katrina Pulbrook senior financial planner at ANZ.
"They walked into very good salaries, with credit easy to get, spending everything they earned - unlike their parents who saved for a rainy day,” she says.
"Now there's uncertainty as to whether or not they'll even be employed, and there's very little money in the bank.
This generation will have a completely different attitude to money going forward - the crisis is actually very good in that respect."
The GFC is also a golden opportunity to get into the fallen stock market. Sounds like an oxymoron, we know.
“History shows that same of the major fortunes have been made during bear markets (a down period of trading following a decline in share prices) in the past,” says Liz Cacciottolo, head of wealth management at UBS Wealth Management.
See, the All Ordinaries Index (the measure of how well the Australian share market is doing) is down about 50 per cent from a high in October 2007.
This means shares are dirt cheap - even blue-chip (top quality) stocks like Rio Tinto and BHP, says Dale Gillham, stock market expert and author of the bestselling How to Beat the Managed Funds by 20%.
And the property market is pretty inviting right now because of falling interest rates and cheaper house prices.
So, it's not all doom and gloom.
STEP 1: Find your worth
Your mum might think you’re priceless, but you need to calculate your net worth in dollars- says Julianne Dowling in her book All About the Money – Honey! ($29.95, Wiley).
“Net worth’ ay sound stuffy, but it boils down to what you own versus what you owe,” she says.
“One of the easiest ways to do this is to take the free wealth test at www.wealthbenchmarks.com.au, which will give you a comprehensive report on your financial position and how it compares to others in your age bracket, life stage and profession.”
STEP 2: Analyse
Don’t pay bills and toss them -read them.
Research utility providers (electricity, gas, phone, internet) to see if you’re getting the best deal.
Compare bank account-keeping fees at mozo.com.au. Put the savings made from changing providers into a don't-touch-it savings account like ING Direct.
"I had a client who went through her finance, made a lot of calls and saved something like $300 a month” says Pulbrook.
"This equalled a house deposit in five years - and she didn't need to change her lifestyle at all."
STEP 3: Get a buffer
Once upon a time, some people moved all their money out of cash into highly volatile stocks because they paid well.
Why accept four per cent interest on a savings account when you can earn 32 per cent on shares?
We now know that can be a dumber idea than stopping off at the tattoo parlour on a hen's night. No matter what you invest in, always have a buffer, urges Pulbrook.
"lf you've got a mortgage, be six months' ahead, just in case you cant pay it for a couple of months (like, if you lose your job).
If you're renting, aim for three months' worth of rent.” It'll ease the panic if your boss calls you in far "the chat”.
STEP 4: Clear bad debts
Yep, there s good debt and bad. Good debts like property or business loans, create value.
No prizes for guessing what bad debt means (the racked-up credit from leaving your card behind the bar).
You can pay off your existing credit card using a new card that has an interest-free honeymoon period, but there are caveats: you must cut up the old card; and you must pay off your credit balance within that period - before the interest rate gets higher than the crowd at a
And never, ever have multiple cards: a survey by the Institute of Chartered Accountants found that consumers with three or more cards had an average debt of $4,387, compared to $1,183 for those with only one.
If you just have to buy stuff on credit, here's what to do, says Pulbrook: if the item's above your means (say, a car), divide the value by the number of months you have to pay it off so you can make the monthly repayments and still eat.
“If you can’t, you’re just being greedy and aspiring to al lifestyle you can’t afford” she says.
STEP 5: Invest
You can earn extra bucks moonlighting as pole dancer. Or, you could grow the money you already have.
There are three main assets you can invest in: cash, real estate and shares.
The trick is to diversify - don't put all our eggs in one basket.
"If you put all your money into shares and the market dropped by 25 per cent, you'd lost 25 per cent of your money," says Cacciottolo.
“But if you put half your money into shares and they fell 25 per cent, you'd only lose 12.5 per cent."
Cash: Keep your money in a high-interest account if you want to access it in the next five years –say, if you’re saving for a holiday or home deposit.
But the interest earned has to be above the rate of inflation, explains Pulbrook:
“For example, if the CPI (consumer price index, which measures inflation) is four per cent, the interest on your cash nerds to be higher than four per cent.
Look at it this way: the price of a coffee will go up but the money you have to buy that coffee isn't growing at the same rate (or better)."
Real estate: "What is it with chicks and bricks?" asks Dowling.
"Most women say they'd rather own property than shares, believing it to be a safer investment that they can relate to."
It seems even safer with Uncle Kev's extra funds, $14,000 for first home owners and $21,000 for first home owners who build their castles.
But if house prices can fall, why do people think property’s safer?
"If you buy shares, the prices come up on the TV screen every night in the news.
With direct property you don't get updates on the daily fluctuations on the worth of your house. Ignorance is bliss,” says Pulbrook.
The first rule of real estate: don't wait to buy property, buy property and wait, since it's a long-term investment, says Robert Allen, author of Nothing Down for Women: The Smart Women's Quick Start Guide to Real Estate Investing ($62.99, Simon & Schuster).
Before you house hunt, use the loan calculator at yahoo7.com.au/womenshealth to work out your price range; keep in min that to avoid paying lender's mortgage insurance, you'll need at least a 20 per cent deposit.
In terms of mortgage repayments, the rule of thumb used to be "Don't spend more than 30 percent of your monthly income" says Naylor.
Wealth coach and property expert Mary King recommends renting your new pad out. (Thought you can only get a First Home Owner Grant if you live in the home for at least six months, as your main residence, within the first year after purchasing it.)
Obviously, this will help pay the interest on your mortgage.
If the interest on the borrowed money is more than the rental income per annum, it might be tax deductible.
"PS: if you manage the property yourself you'll save on agents' fees – seven to eight per cent of the value of the property," says King.
Shares: Don't be scared by the horror movie that is the nightly finance report.
"The market always dips and rises. In Australian Stock Exchange (ASX) history, there have been eight bear markets and after every single one there was a recovery," says Pulbrook. Phew.
There are basically two avenues for share investing: managed funds and buying direct shares.
"Managed funds are popular and easy - it's where a manager invests a pool of investors’ funds.
Like a set menu at a restaurant, all the choices are made for you by a pro," says Dowling. One kind of managed fund is an index fund, which spreads your money across a share index like the ASX200.
So, instead of a fund manager handpicking socks for you, you’re money goes into the top 100, 200 or 300 stocks (depending on index)) in proportion to their weighting in the index.
For example, if BHP has a 14 per cent share of the ASX200, 14 per cent of the money you invest will go into BHP.
"Managed funds will cost you around two per cent of the value of your portfolio per year," says Gillham,
"But index funds are cheaper, at around one per cent or less but tend to mirror the index which typically achieves mediocre performance."
If you're game, you can invest in shares you pick yourself directly through Commsec (CBA) or ETrade (ANZ).
Opening an account is Free and you trade online or over the phone.
"lf you're going to trade this way, you need to devote a lot of your time to research, because you won't get much advice," warms Cacciottolo.
If you're a low-risk-style investor, you'll need to know when so pull out, says Giilham.
"Sell when the share falls 15 per cent. If a share’s trading at $10 and it falls by $1.50, get out before it drops any further.
If someone had told Babcock and Brown shareholders to sell at a 15 per cent drop below a price of $32, they’d be much happier now.
B&B shares are worth less than $1 now."
STEP 6: Be a super-woman
Yeah, nine per cent of your total salary automatically goes into superannuation.
But if you want to drink Grange instead of goon on your 65th birthday, make voluntary contributions.
The earlier you start, the more compound interest you'll earn. Contributions come off the top of your pay so it’s money you don't get taxed on says Pulbrook.
And you can also receive government co-contribution if you're under a certain threshold. Use the co-contribution calculator at ato.gov.au and stop in at fido.asic.gov.au for the super calculator and a worksheet for comparing super funds.
STEP 7: Budget
Now you know exactly where your money needs to go, you can draw up the “B word".
Dowling recommends saving 30 per cent of your wage and using 70 for living.
Divide the savings money into short-term and long-term funds; the short-term funds could be your cash buffer and the longer-term are for super and investing.
Taking the first few steps to develop a little bit of wealth is the greatest hurdle, says Baker.
“The first $10,000 will be harder than the next; the first $100,000 will be harder than the second and they say the first $1,000,000 is also hardest!" she says.
It can be done- just get to it.
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