Interest rates will rise
ERICA ASKS: This week I nearly had a heart attack when I read in the newspaper that economist John Edwards says that interest rates may rise eight times (!) in the next two years. There is no way my family could support this on my husband’s wage (I am a stay-at-home mum), be able to service our mortgage ($550,000) and afford to put our two children through school in a few years’ time. Can you please tell me that this guy is joking?
THE BAREFOOT ECONOMIST REPLIES: Is he joking? Well, let’s see: he’s an economist. He’s middle aged. He’s wearing a sober suit, sensible glasses, and he’s not smiling. I’m pretty sure he wasn’t doing a stand-up routine. However, I think he was taken out of context. Edwards is smart enough to know that no one can predict the future (least of all economists, who on the whole are no better than dart-throwing monkeys). What he was trying to say was that interest rates would move higher (at some point) in the future. Here’s the interesting thing: anyone under the age of 45 — and that includes you and me, Erica — has never experienced a recession in their adult lives. We have no reference point for it. In fact, our only experience is that housing prices go through the roof, and interest rates fall through the floor. People think it’s normal. But it’s not … not even close. The truth is we’re living through one of the greatest booms in modern history. Eventually it will end (though only the monkeys know when). The only advice I’ll give you is to start preparing for higher home loan rates immediately. The worst that could happen is that Edwards and I are wrong … and you pay your home off quicker. No jokes.
…and some more sensible – and amusing – advice from the same Melbourne/Australia columnist…
GO WIDE, PLAY SAFE
GARY ASKS: Our family is in a very fortunate position after selling our business in February this year. We have no debt, own our house valued at $5 million, own a beach house valued at $1.7 million, and have super of $1.7 million and about $5 million in cash. We have sourced some advice on how to invest the $5 million to provide an income stream of hopefully around 5 to 6 per cent per annum (they have suggested buying a commercial property and some investment properties). We now have financial advisers all over us like wet dogs. What would you do?
BAREFOOT REPLIES: Congratulations on your success! To get rich you will have concentrated your risk, and focused all your effort into one business. However, to stay rich you need to do the exact opposite: spread your money across a large number of investments, and take very few risks. Therefore I’d run away from all the wet shaggy dogs that are trying to gnaw on your juicy assets. They have dollar signs in their eyes. Also, stay away from anyone who is recommending you invest directly in commercial or residential property. Reason being, it’s simply not diversified enough, and if you lose a tenant, you lose your yield! Look, you’ve earned the right not to have to worry about your money. So if I were you, I’d keep a hefty amount in cash (for opportunities, and because a $5 million home sounds kind of expensive to maintain!), and invest the rest in a broad mix of shares (local and overseas), via ultra-low cost index funds. The income you generate from dividends should be enough for you to live off without having to draw down on your capital. Finally, you say that you’ve got $1.7 million in superannuation, however, the cap is actually $1.6 million per person, so you may have the ability to contribute more. If you can, you should.
SHARE THE LOVE
GEMMA ASKS: My in-laws are our “financial alpacas” — they keep giving us money! I hate it but my husband loves it. I have asked them to stop, but they won’t, so it just keeps appearing in our account. I know they do it out of love, but the fact is we already earn loads ($200,000 a year)! I honestly believe they want nothing in return. How do I cope knowing I do not have to do anything in your book and we will be just fine? I feel so unproud of myself.
BAREFOOT REPLIES: Well, I can finally retire. I have now officially had every question under the sun. (I’ve been waiting for the “money just keeps appearing in my account” question for years.) Only joking. They sound like they’re generous people who are simply driven by giving (I can think of worst traits to have in in-laws). If I were in your shoes I’d sit down with them and reframe the situation: you don’t need the money, but plenty of people do. So, as a family, could you work together to help the truly needy people in your community? That would make all of you feel proud.
source: www.barefootinvestor.com 2 July 2017 – The Barefoot Investor holds an Australian Financial Services Licence (302081). This is general advice only. It should not replace individual, independent, personal financial advice