SmartyPig

Hold on to your racing hats ladies (and gents), spring is officially in the air.  But before you head off to the track to have a flutter and try your luck on Race 5, Number 6, we thought we’d take a few minutes to check the form guide.  Horses are one thing, but how’s the economy shaping up and what strategies can we use to stay ahead of the game?

Times have been tough, no dispute there.  And although economists believe the worst may be over, we’re still in challenging economic times.  Reserve Bank of Australia (RBA) assistant governor (economics) Phillip Lowe told a conference in Sydney recently, things were returning to normal.  “There are certainly still risks and there are certainly still uncertainties, but not the same risks and not the same uncertainties that were there in the March quarter.” 

But don’t get too excited, there is a down-side to all this crazy optimism.  When the RBA feels that things are on the improve, chances are that interest rates will rise. Or, as Mr Lowe says, it’s “appropriate to return monetary policy to 'normal’”.  And just in case you were wondering, that means there could be several rises in the next year or so, if we’re to believe everything we read.  Just hope you’ve been putting all that cash you’ve been saving on your mortgage repayments somewhere safe.

What’s the solution?  Sure, you could bet the house on that “sure thing” at Flemington on the off-chance that it’s your lucky day.  Or you could take the 'no-lose’ strategy and start (continue?) saving. 

In the latest issue of Money magazine (October), financial commentator Paul Clitheroe tells us how.  (And while we’d love to provide you an online link to the article, alas, if you’re interested, you’ll have to buy the magazine.  Clever people these Money folk. )

“In uncertain times we tend to become savers, not spenders and this has to be a no-lose strategy. As companies repair and rebuild their balance sheets, we should do the same.  While many companies behaved badly during the boom, we individuals were hardly paragons of virtue. The growth in our average levels of personal debt, mortgages and general consumption got pretty silly. Two years ago, on average, we were spending more than we were earning.  Today, we have become savers due to lower mortgage rates, petrol prices and more broadly because we have cut our spending.

Right now things do look better, but the economy is still fragile.  My advice is to take advantage of relatively low unemployment, low rates of interest and bargains everywhere to ensure you spend less than you earn.  Get rid of high-cost personal debt.  Use the level of competition in the market for things like credit cards to roll outstanding debt to a lower rate and then pay it off.

If you are free of high-interest personal debt, get stuck into the mortgage. If this is under control, look at topping up your super via salary sacrifice, consider an investment property or buy a few shares.

All of these steps mean you will be protected if the economy takes a turn for the worse or, if as I expect, recovery is a drawn-out affair. You will be making financial progress.

If I am wrong and we do get a rapid recovery, interest rates will rise and having a lower mortgage and personal debts will leave you well-positioned. Out of the woods? In my opinion we are not there yet. But the great thing about saving and investing is that you win in any climate.”

Good thinking Paul, we couldn’t have said it better ourselves.

So as you study the form guide at the track this spring, take a tip from one of the world’s richest men and most successful investors, Warren Buffet (courtesy of the Barefoot Investor).

Rule Number 1. Don’t lose money.

Rule Number 2. Don’t forget rule number one.

Simple really.  So now you’re on the savings 'horse’, why not stick to it? Chances are you will emerge a winner.

Until next time, keep saving!

Team SmartyPig.