Portal Login

Bringing it all Together

by | May 18, 2019

We all understand the very large majority of us “can’t have it all”. Thankfully, most of us in this, the lucky country, experience scarcity, not on an absolute level, but relative to what we could have and would like to have.

Given we live in an orderly society, protected by the rule of law and property rights, we are not largely fatalistic and can plan and influence, if not determine, the future we want to enjoy.

Living in a specialized society we earn income and must allocate it to satisfy as many needs and wants as possible. We prioritize our needs and those of our dependents first and the surplus income is then either spent on wants (discretionary spending) or saved.

It is a fact that in Australia, income is unevenly distributed, as is wealth. This is a function of luck, hard work, education, inheritance, physical attributes, prevailing public policy, social norms and demographics and the media to name just a few contributing factors. But it is also a product of attitude.

Wealthy people typically have a different attitude to money. They don’t just work for their money; they make their money work for them!

We have seen that investment creates capacity for the future. It is holding off on satisfying all our wants now in the anticipation that future satisfaction may be increased.

It’s akin to ‘delaying gratification”.

As a nation it’s crucial for us to invest and create productive capacity so that we can increase the size of the ‘employment pool’ (or circular flow) or the ‘national pie’. The more people work, the more goods and services are produced and more needs and wants are satisfied and tax receipts rise.

Increased tax receipts (and reduced welfare payments) allows governments to provide more of the goods and services that are too expensive for individuals, but benefit us all, public goods, such as health, defence, police, education and pensions etc.,

A growing economy means that the production possibility frontier shifts out to the right, the national pie gets bigger, the circular flow of income increases, or the swimming pool level rises and more of us can get wet!

As individuals and / or households you too can increase the size of the ‘pie’ and increase the possibilities.

Retirement is a phase of life that looms large for us all. Australians are living longer and healthier on average than ever before and so to maintain a reasonably consistent lifestyle in the “third stage” of life you need to decide which pillars of the retirement income system you will rely on and to what degree – the Age Pension, Compulsory Superannuation, private savings and investments and/or ownership of your own home.

The burden of welfare is increasing and absorbing an ever-increasing proportion of public funds, limiting expenditure on other essential and socially beneficial programs. Governments encourage working Australians to contribute and prepare for their own retirement through legislation and substantial incentives such as tax breaks on super contributions, negative gearing and tax exemptions on post retirement income to name just a few policies.

Just like nations, you will need to make a conscious decision (or policy decision) to refrain from satisfying every want now, (saving) and invest for the future.

It will involve a trade-off, an opportunity forgone.

It is a decision you make, an attitude you adopt and a plan you implement.

You don't have to be a loser

You don’t have to be a ‘loser’….. The Reserve Bank’s duty is to maintain “the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people.” It’s a big ask! The RBA’s decisions to cut the cash rate to record lows would not have been an easy one. As with every decision, there are trade-offs and unintended costs. Economic prosperity requires a growing economy with the capacity to sustain and expand employment opportunities. It’s not hard to see why a rate cut was not just welcomed by loan holders but necessary. When you add the conservative and surplus seeking tightening of the fiscal strings by Government and cautious consumers saving rather than spending, it is imperative to add some fuel to the fire. With spare capacity in the economy, it’s hoped lower interest rates will provide further stimulus to consumer spending without the usual threat of inflation. Weak business borrowing and investment is the preferred target variable in the RBA’s sights. So, why isn’t the latest cut ‘music to the ears’ of everyone? It comes down to the fact that Monetary Policy is what’s referred to as a ‘blunt instrument’- interest rate changes apply generally and are therefore non-specific and often inequitable. The unintended trade off and inequity of the interest rate reductions is undoubtedly the ‘pay cut’ delivered to retirees dependent on income generated from cash in the bank – the ‘losers’ in this situation. Cash is considered to be the safe alternative on the risk scale and many convert their assets to cash to avoid volatility in retirement. What they don’t count on is suffering ‘collateral damage’ for the sake of macro management and being forced to erode their capital. It’s a good recommendation for holding property into retirement and generating income from rent rather than interest alone. It will never be easier than it is now to start building or to grow a portfolio of properties that will allow you to reach retirement with a number of unencumbered assets generating reliable income. You don’t need to be one of the losers….