Oh how things have changed.

Remember the saying "Take care of the pennies and the pounds will take care of themselves"? Notice how I said 'remember' and not 'you know.' That saying seems to be obsolete now the way people act.

There's an article by newsweek and the New Zealand herald worth reading about saving. In 2005, NZ's saving rate was -14.8% of total income! Yes, on average we spend more than we earn. There's a trend around most of the world that shows savings have decreased. Our Grandparents and some of our parents would not be able to comprehend the amount of debt and little savings we have. So why is it that we have such a different mind set from our elders? I'll share a few of my opinions..

Easy credit: Credit cards are being advertised on tv as well as easy to get personal loans. Now you can even get home loans with no money down! They've been giving them out left, right and centre. The credit crisis in America highlights how many loans have been given out to people who could not afford it. This is a huge change from when people used to buy houses for cash. If it wasn't that easy to get credit, maybe we all wouldn't be in so much debt.

Consumerism gone mad: Petrol's expensive? What about water!? Water is put in plastic bottles and you're charged $2 for less than a litre. You could go home and get more for 5c, or just go to a tap outside and fill up an old bottle for free. You think people wouldn't buy this, but a lot of us do it on a daily basis. Since we're not handing over cash these days to pay for things, many people don't think about what they're spending their money on. Coffee everyday, a hamburger, lollies for a sugar fix, porn on the internet, these are usually impulse buys which shouldn't really be done. And do you need those $250 shoes? Your mind says yes but the 10% part of your brain you don't use is saying no...

Lack of education: Were you taught much about budgeting while you were at school? Probably not, and it's probably not a reason for a change in mindset either since your relatives were taught just as much. But with so many different ways of saving with no understanding of what is a good deal could be preventing us from wanting to save. And when you hear about people losing their life savings because they put their money into a failed finance company, you probably feel relieved it wasn't you. And even if you put the money in the bank, is it safe? Perhaps not with all these sub-prime loans floating about.

What can we do about this? Try and change our mindsets. Don't take up credit just because you can, save up a decent deposit before buying a house, try to cut out the majority of your small impulse purchases (only use cash to pay for things if it helps) and get educated. Does anyone have any thoughts on why we aren't saving, or how we can?

How to act during a recession.

This is a follow up to my last entry, which was rather somber. Sorry about that but these are somber times for some people. Although this doesn't necessarily apply to us here in NZ, newsweek published an article about how to survive the recession. I think it's a good read because we can apply some of the tip later on when we are in a recession (or even now since there's a chance we're going to enter one. Some of the good points in the article are:

Leave your retirement investments alone: Right now the share markets are spiraling downwards because of the credit crisis in America. But this isn't a reason to sell since they'll rebound and in 20 years or so you wont notice the loss since your average return will be high. In fact, if you make regular contributions, now would be a good time to make extra contributions since the price of shares now are quite a bargain (relative to probable prices in the future). If you have kiwisaver you can do this easily through internet banking.

Pay down costly debts: This is what I was talking about in my last entry. This applies in good times as well as bad. Since interest rates are so high at the moment, now is a great time to get them paid off.

Stretch out cheap debts: If you have a cheap interest rate, banks and companies will probably be willing to waive fees for voluntary repayments. Why? Because it's a liability for them. They can borrow out that money at the current higher interest rate. People would be willing to pay you to have debt at your low rate, so make sure you take advantage of it and keep it for as long as you can. If you can make extra repayments, pay off other debt if you have it, or put it in the bank (if the interest rates are better), use it towards an emergency fund, or buy things you think you will need in the near future. Take advantage of the cheap debt (it sounds bad, but it really isn't).

Hunt for bargains: The stock prices of the majority of companies has dropped. Some haven't been affected by the credit crisis and have just artificially dropped because of investors' fears. So there are a lot of bargains out there waiting to be discovered. But you must research and understand the company is undervalued before buying a bulk of their shares since it goes against diversity principles. This leads to the next point...

Avoid the urge to get more adventuresome with your investments as a way to make back losses: Were you planning on investing in gold before your portfolio dropped in value? Or are you doing it just because everyone says you should? Or what about derivatives? Or even bank bills if you have a lot of money? NO! Don't try to make up losses by investing in something you don't understand. Go to a professional investment advisor before you do something like that and make sure you understand the risks, the possible returns, and whether it's a good addition to your portfolio before doing anything like that. Otherwise you may as well go and play roulette at the casino. The odds are probably the same except you'll win or lose in a few seconds instead of a few days...

That's some points the article brings up. Do you have any tips of your own? Please share them...

How much debt are you in?

I was reading this article at newsweek.com when I got thinking. I pose the question to you, "If you suddenly had 30 days to repay all the loans (mortgage, credit cards, hire purchase, etc), would you be able to do it?

Maybe you could, maybe you couldn't. If you had a mortgage, chances are you wouldn't be able to unless you sold your house. Hopefully you can if you just took into account your other debt, if you can't, maybe you should look at trying to reduce the amount of debt you have (although you probably already are). Pay the minimum amounts on the lowest interest debts and pay off the higher interest debts as fast as you can. Be more frugal so you can do this as quickly as you can. Or think about getting a debt consolidation loan where all your debts are put onto 1 loan (with hopefully a lower average interest rate). Just remember to cut the credit cards up and never get any more loans otherwise you'll end up in a position where you'll become bankrupt.

You probably have all seen the news where people in America are living in tents because they've had their houses foreclosed because they couldn't make their payments. I sincerely hope this doesn't happen to anyone since it must be such a horrible position to be in. Let us try and learn from this that times are not always rosy. The banks do not always give loans out because they are certain you can pay it back. You never know when you may lose your job, not because you're not skilled at it, but because the labour market tightens and the firm can't support the amount of staff it has.

You should think about saving to have an emergency cash fund, which is completely liquid and safe. A good amount to aim for is 6 months living expenses. This would include rent/mortgage payments, food, petrol and other essentials you require. Then, if times are ever bad, you have a lifeline for things to get back together. This will give you peace of mind, something alot of people would love to have considering their finances may be keeping them up at night.

What do you think? Is an emergency fund a good/bad idea and do you have one or are you considering having one? How many months living expenses do you think is a reasonable amount to have?

Oil

This article from newsweek.com is worth reading. It brings up a few points about the rising cost of petrol and why we shouldn't worry. I'll summarise, but reading the whole article is worth it..

Oil's still not expensive: Relative to what it was a few years ago it is, but compared to 10-15 years ago it's not. Income's have risen more than oil has, so it's not taking up as much of your pay as it may seem. And while it's more expensive than coke, it's still cheaper than some bottled water or starbucks coffee. Are you using your car less since prices have risen? If no, then it's not expensive yet..

Increased prices=increased investment: As the price of oil increases, so does the potential investment opportunities for oil companies. I don't know much about the different opportunities in oil investment, but with more money, they can access areas where they may not have been able to reach if oil prices were lower.

Future demand: Ok, so demand is still going to go up with supply, but one factor which may slow the increase in demand is the decreased reliance of oil. Bio fuels are being introduced into NZ (and probably all around the world). Who knows what the future holds. Cars may have a compartment like in back to the future, where you can put any liquid into it and it'll be converted into fuel for the car. We still have 2 trillion barrels of oil in the ground and we've only used 1 trillion so far. Surely the problem will be solved before it's all used up...

Busy

Hi everyone. Sorry for not posting for a while but I'm swamped with university at the moment. I'll try and write something this weekend. In the meantime, this is an article worth reading.

Take care

Active or passive aggression?

The range of financial investments offered by institutions can be separated into 2 groups, active and passive.

Passive funds track a particular index. The money you invest is used to buy a bundle of shares which is proportion to the index. The fund manager's only buy and sell these shares to keep the bundle proportional to the index. This gives you the market return (known as beta). And example is if you invested in a fund which tracked the NZX50. You would own 50 different stocks in proportion to the size of the companies.

Since little research is required by the fund manager and share trading is kept to a minimum, the fees are kept relatively low. Of course, your returns are restricted to the market return.

Active funds are a portfolio of shares whose composition is decided by the fund manager. The manager researches the companies and buys and sells shares based on his opinion of how share prices will change. You get a return of alpha, which is the total return minus beta.

This means you can have a higher return than the market depending on how well the manager does. However since there is more trading and research involved, the fees are usually higher.

So which are better? It depends on your preference. Personally I think passive funds are better. The fees are lower and you know what you're investing in. The higher fees in active funds usually don't justify the return. This article also has some information.


So which do you prefer?

Disclaimer: You should always consult a professional finance advisor before investing your money (just like you should always consult a doctor before starting a new exercise routine/diet). I'm not a professional, I wrote this article purely for fun.