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Monthly Archives: February 2013

February 2013 – Points to Ponder


What is happening in our economy …………. How are financial markets doing …………….. And a story titled “What If” ……………………

Dear Readers,

Thanks to all of you for accepting our invitation, for accessing our blog, and for your participation & feedback.  Your positive feedback inspires me to explore new ideas & topics. I look forward to more of your active participation.

The Big Picture

The US Nothing much has changed in the US economy or future outlook (more details in our previous monthly blogs).

The US Fed’s indication of a ‘Perpetual Quantitative Easing’ (money out of thin air??) policy, roughly 85 Billion USD per month, is worrying a lot of people.

The logic of ‘Increased money supply = Increased uptake of debt by the economy = increase in GDP/growth’ is debatable ……… to say the least.

It seems it took 3 Dollars of money supply (into the economy) to show up as 1 Dollar worth of GDP growth, in the good old days (1970’s) ……………. Some are now saying it takes up to 20 Dollars or more for the same 1 Dollar worth of GDP growth ………. Not much bang for the 20 bucks ………..

And an indication of the Fed even thinking about looking at an exit to this ‘ongoing Quantitative Easing’ created a ‘wobble’ in worldwide stock & bond markets ………….

Europe The saga continues on ……… More and continuous bailouts, more unrest, unstable governments, elections in Italy ……. Nothing new or positive to write about.

The ‘BRICS’ In most cases have imitated the west (US & Europe) ……… More intervention by central banks in the economy & financial markets, more ‘central planning’, more ‘wealth distribution’ policies ………

There seems to be ‘competitive currency manipulation’ (some are calling it ‘Currency Wars’) by individual countries, to support & benefit from export led growth.

There is much talk of political uncertainty and allegations of corrupt practices, undermining confidence.

Some economists point to inadequate national savings, leading to increased dependency on overseas borrowings to fund much needed infrastructure & other investments.

Emerging economies, mostly modelled on export driven growth, need demand growth from the west (US & Europe), which is not happening  ………. A chicken & egg situation??

Australia Not much has changed in the past few months. Our economy seems to be treading water, in spite of dubious government policies and economic management.

Elections are round the corner, with hopes of a clear mandate and majority in parliament …… A fresh & objective look at better managing our economy, and hopefully, improving overall economic confidence.

What is all the ‘Daily Media Noise’ telling you ? What are you hearing ? What do you think ?

Topic of the Month

What If – A story

I introduced a young couple, Shaun & Sarah, to you in the December 2012 blog. Let us use these characters as the main players in this story.

Act 1 – Shaun & Sarah are both in their early/mid 20’s, have grown up in comfortable, loving homes,  have been gainfully employed recently, and are now planning to move out and make a nest for themselves.

Let us assume both have an average income of $70,000 each, over the next 10 years (they may start off on 50k in year 1 and reach 70k or more in year 10).

Both have studied hard and have landed good jobs, they have a lot of dreams, wants, wishes, etc.

A lot of things to catch up to – That dream car, clothing, gadgets, and lifestyle. They want to live it up – NOW

A friend/family member/well-wisher introduces them to this guy Hari, but they have no time

They decide to rent, in a fashionable and sought after suburb. Both lease the latest high end cars, and upgrade models every 2 years.

They borrow to furnish their rented accommodation, in the best of style, and upgrade it every few years, on credit. They enjoy the latest gadgets, clothing, footwear …….

They eat out in the best joints regularly, exotic holidays every few months ……. An aspirational lifestyle.

Their friendly Bank is more than happy to provide easy access to credit ……. Credit Cards with ever increasing limits, Leases, Personal loans, overdrafts, and more ……..

Shaun & Sarah have always managed to keep up with required minimum payments on their various debts ……… Just so ……… Once or twice having to cut back on a holiday, car upgrade, etc.

They have sometimes talked about savings, property, assets …….. With friends & family …….. But life has been hectic & fun …… and 10 years have passed so quickly …….

Shaun & Sarah are now in their early/mid 30’s …… They are increasingly aware of many of their friends & family having kids, living in their own homes or investing in property …….. Concepts of savings, investment, property, assets, etc. are making increasing sense to them.

One fine day they remember this guy Hari and get in touch with him. Hari encourages them to work out a balance sheet, of what they own and what they owe ………..

We have two late model cars, but we owe money against it …… Monthly interest payments

We have a lot of furnishings, gadgets, clothing …….And personal loans …… Monthly interest payments

We live in a posh place, in an upmarket suburb …….. But pay high monthly rental payments

Bank Savings, investments, etc. – assets? ……….. We have each other, that’s it

Cash Flow? Yes, we work hard for our cash ………. but it flows out faster than it comes in

Now let us rewind ………. Pretend we are back 10 years in time ……….

Act 2 – Shaun & Sarah are both in their early/mid 20’s, have grown up in comfortable, loving homes,  have been gainfully employed recently, and are now planning to move out and make a nest for themselves.

Let us assume both have an average income of $70,000 each, over the next 10 years (they may start off on 50k in year 1 and reach 70k or more in year 10).

Both have studied hard and have landed good jobs, they have a lot of dreams, wants, wishes, etc.

A lot of things to catch up to – That dream car, clothing, gadgets, and lifestyle. They want to live it up – NOW

A friend/family member/well-wisher introduces them to this guy Hari. They listen to what Hari has to say, ask a lot of questions, discuss various options, and decide on a course of action.

Hari assists them to work out their current financial position, current wants, future needs and helps them set long term goals.

They decide to board at one of their parents/family home.

They prepare a monthly budget and a practical savings plan.

They agree to monitor their monthly expenditure and save a healthy part of their net incomes …….

Yes, they have reliable transport and choose to buy cars with Money Saved, not Debt

Yes, they have adequate personal belongings, but Bought with Cash – Not Debt

Yes, they have credit cards, but Do Not Pay Interest on them

Yes, they enjoy a good lifestyle, but Within Budget and Not with Borrowed Money

Hari reviews their financial situation annually and in 2-3 years Shaun & Sarah have saved up to $90,000

They now decide to buy their first property. With prudent advice they decide to buy a unit for up to $300,000. They use most of the saved $90,000 towards a deposit and costs of purchasing their home.

Shaun & Sarah have been assisted in choosing the most appropriate loan product, interest rate, term, features, etc.

Hari encourages them to rework their altered financial position, rethink their current wants & future needs, and update their long term goals.

Hari assists them to manage, effectively, their home loan, debts, expenditure and outgoings

Hari reviews their financial situation annually and assists Shaun & Sarah in maintaining budget discipline, cash flow management, etc.

In 3-4 years Shaun & Sarah have succeeded in managing their cash flow very well.

They have managed Not to Incur Any New Debt

They have managed Not to Pay Interest On their Credit Cards

They have Upgraded motor vehicles, With Savings, Not Debt

They have managed to Pay for all Unforeseen/One off Expenditure with Cash, Not Debt

They have also managed to save up to $60,000, with relation to their home loan & mortgage product.

They now decide, after active consultation & discussion with Hari, to buy an investment property.

They buy property for $400,000 using built up equity in their home plus available funds of up to $60,000 to fund deposit and costs of purchase.

Shaun & Sarah have been assisted in choosing the most appropriate loan product, right structure, interest rate, term, features, etc., by Hari.

Once again, Hari encourages Shaun & Sarah to rework their altered financial position, rethink their current wants & future needs, and update their long term goals.

Hari reviews their financial situation annually, and assists Shaun & Sarah in maintaining budget discipline, cash flow management, etc.

Shaun & Sarah are now in their early/mid 30’s, and take stock of their financial position. Hari encourages them to work out a balance sheet, of what they own and what they owe

We have well maintained motor vehicles, with no debt or interest payments

We have adequate home furnishings, gadgets, clothing, etc., but no debt or interest payments

We live in our own home and pay our mortgage, not a landlord’s mortgage

We have property assets worth in excess of $900,000, with well managed debt against them

We have additional savings/funds available on hand for contingency (Unforeseen/One off Expenditure)

We have plans of diversifying our investments, in the future

Our Cash Flows in faster than it Flows Out, accumulates, and …….. We make it work for us

Time to ‘Pause’ the Video ………… and have a chat about the Story …………..

A lot of thoughts may come into your mind ………………..

Nice story, not possible in reality ………….. (Hari can provide many real life examples)

Lot of unforeseen things happen in 10 years, you can’t plan for all of it …….. (Exactly – If we fail to plan, and review it regularly, and change it if need be ……. We are planning, by default, to fail)

We are not in our twenties (wish we were), it’s too late ……. (Not so …. The older you are, more important it is to act – Talk to Hari – We can take stock of your current situation, look at where you are, decide on where you want to be, and work on a practical course of action ….. It is never too late)

I have made some counter comments, to start off a conversation with you. I am sure you will have many more counter arguments & points to make. I will look forward to a robust discussion.

Please note I have made many assumptions and have done detailed calculations to arrive at all above figures. Pl email Hari, I will be more than happy to work out specific scenarios with you.

I hope the blog is challenging enough to start all of you thinking ……………..

I will leave the forum open to you now ………… What are your thoughts on all of this?

What is your experience?

Come, join the discussion, share your ideas & experiences …….

I look forward to your opinion, counter argument, response, constructive criticism, feedback, etc.

PS: Don’t worry, Act 1 was a nightmare Shaun & Sarah had, Hari made sure their story was similar to Act 2  …………

Looking forward to hearing from you

Hari

 
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Posted by on February 26, 2013 in Uncategorized

 

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