Archive for February, 2012

You Only Live Once

Sunday, February 26th, 2012

With apologies to those who believe in reincarnation, it’s true that you only have one crack at life and implicit in this is that you should live for today. The problem with that is it can lead to a life with unnecessary hardship down the track. The ‘only live once’ approach should perhaps be replaced with a ‘no regrets’ approach. Although on the surface they are similar, the no regrets attitude looks towards the future.

I have heard many a young person justify the personal debt they are in with the line “Well, you only live once!” and I have heard just as many people a few years older express regret at the debt they burdened themselves with when they were younger. So to minimise the chance of regret, I reckon you should think to yourself “You only need to do it tough once.” You get to choose if you will do it tough for a short time by saving up for purchases, or a long time by buying on credit then paying your debts off.

The ‘do it tough once’ thing assumes that you don’t suffer some sort of personal tragedy, illness or disability that you can’t insure yourself against or avoid. Statistics tell us that there is a pretty high chance that you will bit hit with an affliction that’ll lay you off work for a couple of months at some stage in your life. So I guess the reality is that you may have to do it tough twice.

I’m not saying that all the good things you want should be delayed until you no longer have enough teeth to chew your own steak. There is a happy medium between living for today, at a big cost, and not spending a cent ‘til the day you retire. In fact, doing things tough when you’re young means there is little risk of having a retirement where you have to rely on government help.

Doing things tough once also lowers the chances of passing on the burden of debt to your family when you depart. Personally I can think of nothing where I would be more of a failure as a parent than to pass on a large debt with nothing to show for it to my children. Giving my kids the best crack at life has always been a very high priority for me, and being free of debt is a big part of that.

So next time you are tempted to whack that new lounge on credit or buy that car with a loan, think about how much easier life will be later on if you delay the purchase and use your savings instead.

The House Price Oversight

Saturday, February 18th, 2012

House prices in Australia are high. “No shit, Sherlock,” I hear you say, “Tell us something we didn’t know.” Ok, um, Kevin Rudd actually would like to be PM again. Already knew that one too, eh? Well I will tell you something you don’t know about Aussie housing, but first, some basic economics.

The price of everything from a loaf of bread to illegal drugs is dictated by supply and demand. Where you have an increase in demand for a product, like a Justin Bieber album (God knows why there is any demand for him), the price will go up so long as the supply of that product remains stable. Where there is more supply than people wanting to purchase, the price goes down (just you wait and see, Justin). For Aussie housing, exactly the same rule applies.

For many years there has been a large demand for houses, units, townhouses and land in Australia due to a couple of factors, mainly to increases in population from high levels of migration and our fertility rate. Our fertility rate isn’t huge (we’re rooting only slightly more than we’re dying), and migration accounts for between 200,000 – 300,000 more residents every year. As we don’t build enough new houses, to the tune of about 25,000 a year, we currently have an undersupply of about 200,000 homes. So say the economists. Seems simple enough, but I reckon that there are a few things being ignored.

The first is that, thanks to McMansions, the average size of a house today is twice the average size from 1950, and there are heaps more bedrooms. So there is enough room at the parents’ place for many gen Ys to be happy enough to stay, and sometimes to stay there with their partner. After all, the undersupply of housing in Australia has not led to an incredible increase in homeless people.

The other bit overlooked by economists is about the migration figures. Given that there is a large number of people coming from countries with higher population densities than in Australia, it’s quite plausible that migrants are happy living in more cramped conditions than the average Aussie. For example, a guy moving from Japan, where the average amount of housing is just 47 square metres per person, would gladly move into a “cramped” sharehouse in Australia where the average floor space is about 84 square metres per person.

So an increase in migration may not equate to a corresponding undersupply in housing, especially when the economies in other countries start to pick up and those countries call for skilled migrants. Many a skilled worker has left Australia for more money overseas.

I’m not predicting a migrant-exodus-led house price crash in Australia, but I am saying that I believe the simple figures that you hear about on the news need looking at more closely, especially if the undersupply problem is addressed by an initiative to build lots more houses, and whilst ever the people pushing the undersupply line have a vested interest in keeping house prices inflated.

In the end, house prices simply can’t continue to rise as they have over recent years as the average income earner, and above average income earner, will not be able to afford to buy one.

Good Debt?

Friday, February 10th, 2012

There are a lot of people in finance who like to talk about good debt and bad debt, as though debt could either be well behaved or dig lots of holes in your garden. Perhaps debt should be referred to as naughty or nice. I guess in the simplest forms you could categorise them like that, but life’s not that simple so I prefer to refer to debt in a different, more complex way.

Debt is either tax deductible or its not, and debt is used to buy something that will either rise or fall in value.

While you are still awake I’ll tell you about tax deductible debt; it’s anything that can be included in your personal or business tax return (yes, you might need to grab yourself a coffee at this point). The majority of taxpayers would not be able to claim a tax deduction on their credit card or personal loan interest, because the purchase that’s accruing interest hasn’t been for something that earns income. If you use your car for work (that’s at work, not driving to and from the office) and your car has a loan, you will be able to claim a bit of the interest on that loan. Tax deductible debts are also the loans used to purchase investments like shares and property (but not vacant blocks of land). Because the tax deduction allows you to effectively lower the interest you pay, there is not the same urgency to pay off these loans. Thus the ‘good’ debt. [As a side, I’ve never heard from a victim of a rogue geared investment scheme referring to the debt that crippled them as being good in any way.]

When you have purchased something with debt that you can’t claim on your tax (pair of jeans, Blu-ray recorder, cat food, snowboard, etc.) then you want to pay this off as soon as you can. This debt is usually for stuff that falls in value (the coffee you have just finished won’t be worth too much now, and the cat food’s only worth something if it’s been half eaten by Paris Hilton’s dog, you can prove it, and successfully sell it to some idiot on eBay). Bad debt. Naughty debt. Go and sit in the corner.

Things in the non-tax deductible debt category that go up in value are usually only homes (mortgages) and qualifications (FEE HELP). They might not always rise in value but they should be worth more as the years go by. Sort of, kinda, alright good debt. Good because it’s not bad, but I’d never refer to a half million dollar mortgage as good. These debts should still be paid off quickly, but there’s no need to pay off FEE HELP or HECS debt quickly.

Like I said, it’s complicated.

To make it easy to remember, get rid of all the debt that you can’t claim on your tax, especially if the debt was used to buy things that aren’t worth as much anymore. After they’re gone then you can concentrate on paying off that geared share portfolio and investment property.

Sam or Greg?

Saturday, February 4th, 2012

In recent weeks The Wiggles announced that the yellow Wiggle was changing. Wiggles management said that the original yellow Wiggle, Greg would be rejoining (unlike the way that Pippa from Home and Away changed where we just had to accept a new person playing the role without a press conference – I’m still getting over one).

If media reports are true, Greg’s return has less to do with wanting to don the skivvy again and more to do with a bad investment. When Greg left the group 6 years ago he received a payout of around $20 million. This in turn was allegedly invested into a property development that went belly up. If this is the case it would seem that Greg broke one of the fundamental rules of investing – don’t put all your eggs in the one basket. This decision led, in part or full, to Sam leaving the group after having been recognised as bringing a new energy to an aging outfit.

There have been the inevitable suggestions from the public regarding whacking Sam in a green top and adding him as a fifth Wiggle, but they’ve been there before.  The original Wiggles album was recorded by five cast members, albeit without their famous colours (and if you have a copy on CD, signed by all five, I reckon it’d be worth a bit.) The fifth Wiggle, Phillip Wilcher, wrote most of the first album, which was re-released years later with all of Wilcher’s work removed.

For a group described as Australia’s richest entertainers, there would seem to be little generosity extended to Sam. He allegedly earned a salary of $200,000 a year for his time as lead singer and was offered just $60,000 when he left. It might seem like a lot of money to you and I, but it’s a tiny fraction of the $27 million they earned last year. In recent days, Wiggles management have released accounting figures to show that despite earning many millions, the outfit made a $2.5 million loss last year and that the five owners are propping the company up with a $7.2 million loan via another Wiggles company. Talk about complicated accounting.

It seems that money, and in this instance big money, changes things. I met The Wiggles 15 odd years ago and was thoroughly impressed with them – they were genuinely nice guys who adored their fans. I don’t know if and to what extent they may have changed since then.

Whether you are on team Sam or team Greg, one thing can’t be denied – Sam’s departure is a blow to the chances of The Wiggles implementing a succession plan to hand over the performance to four new Aussie faces. High Five managed to keep their brand alive after the original cast left but there is concern that The Wiggles won’t pull off the same stunt when the time comes. If they can’t then it’s the kids who will suffer (and their parents who will have to rely on aging DVDs and/or a US based group to see them through every morning).

All this may or may not be accurate. The truth, as they say, might lie somewhere in the middle. But I can’t help thinking that the fresh young face of Sam would still be there if it were not for that investment gone wrong.

Think about that next time someone says you should put all your money into a single asset.