Woke up this morning, usual morning ritual. Check emails, respond to emails, eat breakfast, have coffee, check Aussie news channels…and so on.
But while browsing the ABC website, I was abruptly smacked in the face.
It was all because of the opening paragraph about Australia’s latest ‘economic boom’.
‘Australian economic growth has picked up pace, growing by 3.4 per cent in the year to the end of June fuelled by consumer spending and financed by shrinking household savings.’
Apparently this is the kind of growth we haven’t seen ‘…since September 2012 during the height of the post-GFC mining boom.’ According to the ABC News article, that is.
However, there is a big problem brewing with the latest stats on economic growth. And you don’t need to be an economic laureate to figure it out.
Asset rich, cash poor — the Aussie dream
Growth is up. Spending is up. Savings are down.
In fact, savings as a ratio of income is just 1%. Here’s some high-level maths for you; a person on $100,000 a year is saving just $1,000. The rest is spent on bills, food, living expenses, entertainment…all the things people spend money on.
Here are a few other things to consider with this ‘economic boom’.
Business lending is negative. That means lending money to businesses is actually on the decrease. Household lending — i.e. mortgages — is also flat. What does this tell us?
Credit squeeze.
We also know that deposits across the major banks are flat. But that pretty much goes hand in hand with the fact no one’s saving anything.
This whole back-slapping exercise of a strong Aussie economy really is masking the reality. The economy might be growing, but the average Aussie household is marching towards a breaking point.
And it means the near future is fraught with danger.
I was talking with a mate about this. He knows a very successful builder. The builder has just expanded his workforce, adding several more people —mainly tradies.
Most of them are on incomes ranging from $100,000 to $200,000. As I say, a very successful builder.
But he was also saying around 95% (rough estimate) of his workforce live payday to payday. He knows this because when he moved his payroll by a week, most of them freaked out.
Think about that for a moment. What would lead someone on a good whack of income to freak out because payroll got bumped by a week?
There’s only one answer — it’s because they would miss obligations. Maybe it means the mortgage payment is now late. Maybe the credit card payment is late. Maybe the car, boat, Jet Ski payment is late.
It means that your typical Aussie household has very little in the way of liquid savings. Now that’s not to say the average household doesn’t have savings. It’s just that for many people, that ‘savings’ is tied up in an illiquid asset like their house.
Repaying the principal residence with a capital and interest repayment is smart. Overpaying with extra capital amounts is very smart. But the key is to ensure there’s a balance between liquid and illiquid savings.
If all your money tips into the house but you’re going to be late on bills, that’s bad. But what’s worse is that if you quickly find yourself asset rich and cash poor, you’re on a road to a rude wake up call. [openx slug=inpost]
Financial advice 101: Cash flow is king
With economic growth booming and inflation rising, things are only going to get more expensive. However, we also know that wage growth is weak. This leads to dwindling disposable income.
Of course, it’s easy to pull back on spending and maybe even stop those overpayments on the mortgage. That might free up a little cash flow…for a short while.
But then what? If your income isn’t growing and that cash flow quickly evaporates, what next?
Well, when you’re cash-flow poor but asset rich, it means you’ll need to re-mortgage to release some ‘savings’, or even sell a property to really get things sorted out.
However, let’s not forget the banks are on a bit of a credit squeeze at the moment. So they’re not going to be as easy to win over as they once were.
It’s going to be harder to get that refinance done because your wages aren’t growing, you’ve got barely any savings and as we’re seeing, the values of property are creeping lower.
I’m of the view that we’re going to continue to see lower property values. In fact, I envisage that we could see property in Sydney and Melbourne surge another 15% lower from here.
I think forced sales are going to hit the market. I see desperate, cash-poor households will need to re-evaluate their overstretched budgets. And just to clear non-mortgage debt they’re going to have to fire sale the family home.
It might sound dire, but that’s the situation when you’re cash poor. You may have the biggest house in the street, but that means nothing if you have no cash flow.
Most people don’t run a personal budget. Most people (clearly) don’t save money. Hopefully that’s not you. And if you’re in a position where you’ve got cash flow, then you absolutely must be thinking about that rainy day.
It means diversification away from property. It means having a big stash of cash in the coffers. I like to think that around nine months of household expenses (bills and day to day living expenses) should be held in cash savings.
It may also be prudent to ensure you’ve got more liquid assets. Investments across stocks, some term deposits…and yes, even high risk cryptos.
Now this comes with a big old caveat: the balance of assets should be based on your own plan and risk tolerances and stage of life. But it’s wise to diversify. You must run your personal budget like a business — using a real cash flow and balance sheet.
Cash flow is king in this world, and particularly in an ever expensive and tumultuous Australia. And making the right choices about how and where you park your money before you run out is crucial.
This might seem like the most basic piece of advice I’ve given all year. But according to the stats, it seems most people simply don’t do it.
These are lessons from financial advice 101. Get your cash flow right, diversify your assets, save your money before you can spend it, live within your means and don’t overstretch with debt.
Get those basics right and you’ll be streets ahead of the average punter. In fact, you’ll be an outlier — and ultimately financially better off in the long run.
Regards,
Sam Volkering