When I meet a ‘personal finance junkie’ – people driven by their finances, interested in shares or property, people who know how much they’ve spent YTD and what their pension account was worth at the start of the month – I’m often intrigued to know where it all started. Especially if this person is 20-something years old, since young people tend to be more care-free about their finances. Is this something that they’ve been brought up to do? Or was there a moment where they clicked into the realisation that being financially savvy is something they needed to be? I feel like many people have these moments, so I’d like to share mine.
Just before the financial crisis of 2008, interest rates were rising in Australia. As a young person renting, with no home loan, I was already recording my finances and constantly growing my savings. But I didn’t have any inclination to get interested in the markets (other than ‘I’ll do it someday when I have more money’). I had some resistance to the idea, based on some vague notion that all business people/investors were greedy. I was putting decent money away and earning more and more interest on it, and to me at the time that was enough.
Early 2008 I met up with my best mate one night going for a drive around the suburbs of Sydney. He was interested in the markets, buying and selling shares, and telling me about the situation at the time. He asked me how much interest I was earning. 7.5% I said – “and that’s really decent I reckon”.
“Wrong” informed my mate – “did you take into account inflation? It’s about 4.5% at the moment, you’re actually earning 3% in real terms”.
Oh. “Still, 3% is orright isn’t it?” I asked.
“Wrong again”, my mate informed “you get taxed 30% on all your earnings – including your interest – you’re only gaining 2%”.
Oh. “Still, at least I’m coming out ahead, right?” I asked, starting to wonder if I should be thinking of doing something else with my money.
“Well, yeah… at the moment” said my mate “but shares are going down at the moment, and I reckon the economic outlook isn’t great. This’ll mean interest rates will probably go down – inflation will follow, but not right away. If interest rates get slashed to 4%, and inflation stays where it is, you’re actually losing money in terms of purchasing power”.
That was my wake up call. What was the point of scrimping and saving when interest-inflation differentials meant that I might be losing money? Is saving a few cents on every item at the supermarket worth it when you’re not trying to maximise the interest rate on your savings account? I began a lifelong journey to educate myself about economics, the markets, investing, the way inflation is calculated and the role of central banks. I’ve started to take notice of the effect of management fees on my superannuation accounts, and question the rates of return of my savings accounts. I’ve been motivated to learn how to invest and started a very small yet highly researched share portfolio. I have questioned the way I view money: the concept of seeking value in spending, the actual point of saving, the need for a focus and goals when investing.
If you haven’t had this wake up call, look at the latest interest rate and inflation figures on the RBA, Bank of England or Fed Reserve website. And think back to your last pay rise. Was it just an inflation adjustment – if that at all?