Money’s cheap – but how do you make the most of it?
06 Dec 2013
There is speculation that interest rates in Australia have hit rock bottom. As economic experts debate whether the Reserve Bank has one more shot in the locker (or not), the overnight cash rate sits at 2.50% (as at 6 November 2013), the lowest rate since 1959.
Australian singer Johnny O'Keefe may have been rocking around the clock in 1959 – but in 2013 it is the big four banks who are enjoying the party, with a reported combined profit of $27 billion on the back of millions of investors still sheltering in the safety of low interest bank deposits. When money is so cheap – how can you benefit?
Should I panic?
In Japan for many decades, low interest rates have meant the economy is on life support – recording weak economic growth – not helped by an ageing demographic. In Australia though, do low interest rates mean that our own domestic economy is cooked? Not at all – a close review of the "interest rate curve" will show that long-term interest rates – think 10 year bonds – are above 4%, this indicates an optimism that the economy and inflation will pick up over time. This should be good for asset prices – things like your house, or your share portfolio. In other words, don't panic – be optimistic.
Should I be borrowing cheap money?
For wealth creation, borrowing within your means, using "good debt", to buy a quality asset works. Think of the stories you have heard of people scrimping and saving for a deposit on their first home – then living in it and improving it over a lifetime – the Australian dream is a time honoured strategy. However, a so called 'cheapish' loan (with fees) to purchase a car you can't really afford and which is expected to fall in value – well, that's not a wise investment option and it may not even be a good lifestyle choice if it means you have to compromise on your other lifestyle choices!
Investors – think like a lender!
If you have money in a term deposit, you should think like a lender. Let's say you were earning 6% on your term deposit and now you are earning only 3%.If you were thinking as a lender, you are only charging half the interest to lend money for the same credit risk (ie, to the bank). With central bank interest rates so low, it may be time to peep out of the woods and take on a little more risk – shares anyone?
So what can you draw from all this?
My conclusion, is if interest rates are at rock bottom, the only way for them to go is up. If interest rate markets see better times ahead, you too should feel empowered to be more optimistic. Review your loans, review your deposits, and get some professional advice from an expert on investment opportunities.
To learn more about Chris, view his online profile.