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Image Courtesy of Designing Wealth

It’s A Household Story

A month or two ago I was actually reading a report written by former governor of the Reserve Bank of Australia, Glenn Stevens. A witty, insightful and wonderful paper that reflected on the cycles of markets. It made me think of Adam Smith’s Theory of Moral Sentiments and discussion on the human condition and inevitability of human behaviour. My mind wandered about to Mr Market. Mr Market is like most of us with good days, bad days and mood swings. Sometimes Mr Market is feeling so good that equity prices go up inexplicably, and other days Mr Market is in a funk or hangry, as prices keep falling. It is in light of these uncontrollable moods of the market and people that this article goes inward. It goes back to the household, goes back to you and me, and what we can control.

Let’s ignore Mr Market and all the doctors predicting his health and his moods for 2018, and lets get a bit introspective. Let’s look at some tools, new technology and how to get a bit more out every dollar and make our lives richer in 2018.

“Money is only a tool. It will take you wherever you wish, but it will not replace you as the driver.”- Ayn Rand

INCOME

I don’t know about you but I’m hanging out for a pay rise. It’s widely published that wage growth has been subdued. Central bankers have told the public to ask for a pay rise but it’s not really that simple is it. Job security, social norms, and comfort often persuade us to hold out for that pay increase rather than to push the envelope and take the initiative. The US Marines would tell you to be aggressive, take the initiative and control the tempo. They may be onto something.

What we can expect this year is that the labour market will continue to tighten and as sectors reach full employment or exceed it, then wage growth will follow. It only makes sense that wages go up once everyone has jobs. Employers won’t be able to find talent easily and will need to poach employees from other firms or industries. The easiest way to do that is with a nice juicy carrot in the form of a higher salary.

The media attention and expected rises in inflation should help with those who take the initiative as employers will be conscious of wages. Leverage that.

What really counts, is getting more from your income. Who cares if its a big or small amount, every dollar matters and it’s always better to get your money to do the heavy lifting. Passive income, saving and conscious consumption are all aspects of capitalising on that income you do get.

Passive income is where you invest in a stock, bond, note or asset that will provide regular distributions. In Australia, every man and his dog is looking for an investment property to get that passive income. The traditional American families look at bonds. It doesn’t matter what you invest in, all that matters is that it provides regular returns. It could be as simple as putting some money in a Term Deposit at your local bank and earning a higher interest rate. The idea here is that you are putting money aside for a modest but consistent return. Income investments are also typically for longer time horizons so make sure you don’t need that money any time soon. You don’t want to pay to buy an asset, only to sell it before you get any income. The income idea is simple though, $5000 in corporate notes at 5% is $250 more in your hand every year. There’s your passive income. .

Just remember these two things:

  1. It all adds up.
  2. The snowball effect. As the money compounds and grows, it picks up pace, getting larger and larger, faster and faster.

SAVINGS

Savings or as some of us pompous economists call it, deferred consumption, are critical to building wealth. The importance of savings probably comes as no surprise to you, yet for some reason it seems hard for most of us to do. Thankfully the infamous Oracle of Omaha, Warren Buffet, has had a few things to say about saving over the years. The idea’s are basic and brilliant, so lets be brilliant at the basics.

With the benefit of time and the beauty of compounding savings are a snowballing gateway to future prosperity, wealth and happiness. A little sacrifice today can make a big difference tomorrow but it takes some discipline, and a few tricks to help. As a bit of “#FinSpo” and general inspiration here are some great quotes and proverbs.

“The best time to plant a tree was 25 years ago. The next best time is now.”

“Most behavior is habitual … and they say that the chains of habit are too light to be felt until they are too heavy to be broken.” — Warren Buffett

The first trick to savings is to save first. Take that money straight out of your pay cheque and stick it in a high interest account. A common mistake is to save what’s left from your wage. Average Joe gets his pay and pays the bills, goes shopping, then just before he gets his next pay he puts what ever is left over in a savings account. Joe’s savings are variable and small. Savvy Joanne gets her pay and puts 20% in her savings straight away. She then shops on the rest. So trick number one is to SAVE FIRST.

Savings eventually provide the tools for investment and growing that wealth exponentially.

The other really simple thing is to be conscious of how you spend your money.

SMART CONSUMPTION

It’s not easy thinking like an economist. Rational thinking, opportunity costs, trade offs and all that. Sometimes it can be incredibly frustrating. On Thursday I forgot to pack my lunch before heading off to work. So here I am at 12:30pm getting hungry and wondering what to do. I settled on a pie. Just 600m away I could buy one hot pie at $3 or I could go to the supermarket and buy 6 frozen pies for $3.50. Needless to say, I went to the supermarket.

Other annoying consumption habits are comparing the value of spending $150 on shoes and how many activities, shirts, or groceries you could get with that. Now I don’t actually recommend living like this. It’s a bit weird and unnessary becuase you need to live a little as well!

A great savings tool and wealth building tool is just simply being smart with your consumption. Buying coffee every day on your way to work can easily add up to $1,000 a year. Think before you spend.

“The bitterness of poor quality remains long after the sweetness of low price is forgotten.” — Benjamin Franklin

When you shop, shop for things you need and that represent good value. Ever been to the supermarket on an empty stomach? Probably bought some extra snacks too.

Track what you spend and think about what you’re buying.

TECHNOLOGY & WEALTH IN THE NEW AGE

Technology and especially smartphones have been pervasive. Creeping into every aspect of our lives the internet has changed the way we interact with the world and with the market place. Gone are the days where you were confined to what was available at your local mall. These days you can buy almost anything from virtually anywhere and the purchases are easily tracked and traced. Just think, you can make a purchase and log into your internet banking and within seconds a record of the purchase is there.

The opening of the market has actually been great for the consumer. We can now access so many more market places, and see where the best prices are. The internet has effectively increased competition and is, believe it or not, one of the critical factors to persistently low inflation. Now this article isn’t about the internet and inflation, it’s about how the internet and technology can save/make you more money.

Following on the idea of smart consumption, I recently started trialling shopping online. I found that by shopping online and even with a small delivery fee I saved a lot of time, and a lot of money. I could walk around the house and buy exactly what I needed. I wasn’t seduced by the discount on chocolates, or the buy 2 and get 1 free offer, or even that grumbling stomach begging for a snack.

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Retailers like Amazon, Whole Foods, and even Walmart allow you to shop online. You can shop the specials if that’s what you’d like to do or just buy exactly what you need. It’s a bit of a different idea to shop online for regular things but it actually makes sense. It addresses some of our behavioural heuristics and takes the “want” factor off the table.

After trialling shopping online I recommended it to some friends and family and looked for their feedback. I was surprised when they all reported that they enjoyed getting the groceries delivered to the door and didn’t have to go out and spend all that time in the supermarket. They also all reported that they’d been saving money and some even went as far as comparing the cost for their shopping list on multiple online grocers! So if you want to save a dollar or two then either have a disciplined approach to the supermarket or try something different and shop online.

Another, more intriguing shopping tool I came across recently was Afterpay. It’s like lay-buy and a credit card at the same time. At first I was very skeptical of the service and was curious as to how the business made money. Surely they had to be ripping the consumer off somewhere. After trawling through their company information I found that they make money from the retailer, the business and not the consumer.

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A customer using Afterpay pays the exact same amount as someone paying full price in cash. Now the reason I like Afterpay as a way to save money is that the cost of the item is paid over 4 instalments. What this means is that you only have small amounts coming out of your bank account, leaving a larger sum to accrue interest. The larger the balance of your savings account the more interest you earn, which as we know, snowballs to become more and more. The virtue of things like Afterpay and to an extent credit cards (for the disciplined who pay in full every month) is that they allow us to earn more interest on our bank accounts. As a way of simplicity and hassle free shopping, Afterpay has my vote.

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The last little nugget I’d like to share with you is something we touched on earlier. Tracking your spending. I’m an old school person that rocks an excel spreadsheet for budgets and tracking expenditure but there are some really great apps out there these days. The photos above are for an app called Pocketbook. This app links to your bank accounts and you can see dollars in and dollars out. Set budgets for different types of expenses and monitor your spending.

It’s remarkable how tracking your spending and seeing the results is an eye opener. The sudden realisation of how much you actually spend eating out or on pointless things. Just by being conscious, by being a smart consumer and aware of your own behaviours you will improve your situation.

It doesn’t take much. All you need to do is think about what you do with your money.

“ Don’t tell me what you value, show me your budget, and I’ll tell you what you value” — Joe Biden

If you have any other recommendations on how to get a bit more out of 2018 financially then leave a response and share the wisdom. Additionally if you found this article interesting and insightful then please refer it your friends and family.

Thank you for reading.

Yours,
Chris Leeson

Bringing finance and economics to you with a focus on in-depth analysis and everyday life.

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