August 31, 2019
While I consume little news these days, I still manage to come across various stories along the lines of…
The economy is sluggish and headed for recession. Secure full-time jobs are rare and hard to get. And wages growth is stagnant, while the cost of living continues to rise relentlessly.
Today we’ll take a peek into these topics and I’ll offer some thoughts on actions to take in the current environment to help cement your path to Financial Independence.
Now, I don’t typically buy into the negativity in the media. But it’s no secret that the economy is growing a little slower than normal at the moment.
And seeing this, the Reserve Bank of Australia (RBA) has lowered interest rates twice so far in 2019, with more rate cuts possible. This attempt to stimulate the economy is to aid in getting unemployment down (not that it’s even high) and wages up.
The sluggish economy has been felt more keenly here in the West than in the eastern states. So the rate cuts are most welcome!
On top of this, some jobs are being increasingly casualised, as companies look to hire workers but retain more flexibility than traditional full-time employment. And while this sounds like a negative for those working and saving right now, there is a positive side to casualisation, which I’ll touch on later.
But the jobs market is not as bad as you might think. Here’s some perspective from Pete Wargent via his excellent blog…
“Annual employment growth accelerated to +332,600, or 2.64%, taking total Aussie employment to beyond 12.9 million for the first time. For some perspective on all the apparently gloomy news out there, the economy has added a thunderous +910,000 jobs over the past three years alone.”
So things have improved quite a bit over the last 5 years, and have simply weakened a little in the last 6 months. But it’s true that the economy is hardly flying.
Despite what you hear, this doesn’t mean a recession and massive job losses are a given. We may just see a period of slow growth, before lower interest rates, tax cuts, a lower Aussie dollar and other things help to get the economy moving again.
By the way, a recession doesn’t have to be a bad thing – I’ll explain why in a minute. But now let’s look at another hot topic – wages growth.
So, depending on the journalist, wages are either ‘stagnant’, ‘stalled’, ‘not keeping up’, or ‘stuck in a rut’. Is this actually true?
Well, over the last 12 months, wages grew at a rate of 2.3%. That doesn’t sound too exciting, does it? Wages have certainly grown faster in the past. Here’s the Aussie Wage Price Index for public (govt) and private sectors over the last 20 years…
Going by emotive media articles and gossip, we’d be expecting that line to be completely flat! And we can see the trend has indeed flattened out a little in the last few years. But overall, wages have continued to rise.
In truth, the pace of wages growth doesn’t mean much by itself. What’s more important, is when it’s measured against inflation. That’s how we can get an indicator of whether our real wages are actually growing or not.
If you’re getting a 5% wage increase, but inflation is currently running at 5%, you’re really no further forward. On the other hand, if you received a 3% increase, when inflation is 2%, then you’re better off in real terms.
So context is very important. Now, let’s look at the other side of the coin, inflation.
The cost of living – what about that?
The RBA targets annual inflation of between 2% and 3%. But in the last few years inflation has been regularly below 2%.
Over the last 12 months, the RBA has the Consumer Price Index (CPI) growing at 1.6%, as of June 2019. Pretty low. And if you remember, the Wage Price Index increased by 2.3%. This means real wages actually grew by 0.7%. In fact, it’s a similar story over the last ten years…
And that’s assuming you simply accept any price rises and don’t optimise – which should be your natural reflex to price increases!
Some people believe the inflation numbers aren’t accurate, and that the cost of living is ‘out of control’. I don’t buy this for a second. I actually think the inflation estimates are overstated!
But it’s not just me. In fact, in its own paper, the RBA says that the CPI numbers are upwardly biased in several ways and likely overstate actual cost of living increases, by as much as 1% per annum.
CPI assumes you don’t shop around for deals or make substitute purchases. CPI ignores the discount wonderland of online shopping. CPI is also adjusted to include lifestyle upgrades.
The RBA’s paper also confirms something I had suspected for some time…
“Over time, individuals may not compare the cost of achieving the same standard of living, but rather that of a ‘reasonable’ standard of living. Real consumption per person has risen substantially over time, indicating that living standards have increased. Thereby, it is likely that the notion of what is a reasonable standard of living has also increased, as households have become accustomed to consuming more goods and services and those of a higher quality. As a result, perceived increases in the cost of living partly reflect the cost of attaining a higher standard of living for many households.”
In other words, people feel as though living costs are going up. But often, it’s the cost of their desired lifestyle which has increased.
As you can imagine, CPI is likely even more overstated for many of us in the FI community. We’re known to raise a quiet middle finger to inflation, and shop around more than the average consumer. We’re also more likely to delay gratification and less likely to feel the need to constantly upgrade our cars, phones etc.
If you’re keen, check out my post ‘The Real Cost of Living’, where I dig into inflation, wages and affluence over the last 50-100 years. Lots of good nuggets in there, and even a rant, so check it out!
Your cost of living can go up every year. But it doesn’t have to. Much more is in our control than we think. We control where we live, what we eat, what we buy and how we entertain ourselves.
I think many of us are simply looking backwards to the ‘good old days’, and bemoaning an economy that has been growing for nearly 30 years!
We’re anchoring to years past when inflation and wages growth was higher. But remember, wages growth needed to be higher just to keep up.
Inflation is now much lower, at under 2%, so of course wages growth is low. Yet, wages growth is still more than inflation. Why should it be any higher?
We humans are strange creatures. We prefer larger numbers to small ones, even when it makes no rational sense. Many would prefer a 4% wage rise with 4% inflation, compared with a 2% wage rise and 1% inflation. That’s despite the second option resulting in a higher real income than before.
Firstly, that things aren’t as bad as they seem. So recognise this and don’t buy into the negativity. Yes the economy is a little slow right now. Yes, wages aren’t growing that fast.
But with inflation so low, we still have more income at our disposal than we’ve ever had before. And if we don’t, then it could just be down to our own situation and it’s worth looking at the choices we’re making.
In the last 100 years, real incomes have grown so much that we now spend only a fraction of our wage on basics like food and clothing, compared to more than half back then. And our bucket of optional extras has expanded enormously.
Buying your ideal home can quickly destroy your dreams of Financial Independence. But what’s forgotten is that buying housing is also a choice, which more than any other, should be weighed carefully. Especially when that decision involves half a million dollars or more of debt.
Here’s something strange I’ve observed: The hardest part about renting isn’t having to move, or dealing with inspections and property managers. Because that stuff’s no big deal. Instead, the hardest part of renting is dealing with people who think you’re insane for renting!
Anyway, my point is, whatever our situation, we need to take complete ownership for that. Nobody can sustainably improve your situation but you. Excuses and reasoning make us feel better in the short run, but ultimately, get us nowhere.
Maybe you believe things are really tough out there and you want to ensure you keep making progress towards your goals. In that case, my number one recommendation is to increase your savings rate.
Seriously. If there’s a recession coming, and there’s a chance of job loss, having lower expenses and more savings will help immensely.
And with wages rising at a pretty slow pace, guess what? Saving more money is the fastest way to strengthen your current financial situation. In fact, it always is.
By all means, keep cash on hand as a safety net in case of job loss. But after that, our savings can’t just sit around – we need to use our money productively! That’s why…
We need to continue putting as much money as we can into investments which will go out to earn more dollars for us. It sounds simple, but it’s very powerful.
And if there’s a recession and shares plummet, that’s actually the best thing that could happen to us when we’re trying to build a portfolio! As we keep buying, we’ll be scooping up more and more shares for the same dollar investment each month.
This is provided you aren’t unfortunate enough to lose your job. In that case, work your arse off to get a new one, and start saving and investing as quickly as possible.
By the way, please ignore the doom and gloom forecasts. Nobody knows what’s going to happen, or when it will happen. The experts have no idea, and neither do I. The difference is, I know I have no idea… while some are delusional and convinced they can see the future.
Or as Warren Buffett puts it, “Market forecasters will fill your ear, but will never fill your wallet.”
Lastly, if growth and market returns end up being slow for a while, then dividends are arguably an even more important source of return going forward. Either way, keep investing and focus on the long term.
If you haven’t already, this is a great time to get a better mortgage rate. Ring up your bank, or do some shopping around and get your mortgage rate as low as you can. That could be a couple of thousand dollars per year for very little work!
You can also take advantage of the current low rates to make extra payments and smash your mortgage much sooner. I know some readers are already doing this.
Consider buying a long term home if you’re renting. With interest rates heading towards 3%, even adding yearly ownership costs of 1%, home ownership is getting pretty close to the cost of renting in many places. Add to this, that prices have fallen in Sydney and Melbourne over the last 2 years, and have been flat or falling for a while now in Brisbane and Perth.
But if you do buy, stay there! The costs of selling and moving are eye-watering. You’ll be out of pocket many tens of thousands each time. This point is often overlooked, but I can’t state it strongly enough.
Of course, your other option is to pay the bare minimum on your home loan, and invest all your spare cash elsewhere for a higher long term return. I discuss the options in detail in this post – Mortgage, Investing or Super.
Whatever you choose, each option is a win in its own way. So choose whichever option suits you best.
I was gonna say, start a side-hustle. But that term makes me cringe for some reason. Maybe it’s been over-hyped for too long?
Either way, the so-called gig economy is here to stay. Right now, you can earn money in all sorts of weird and wonderful ways, on platforms like Airtasker and others.
For those with some extra time, consider doing some casual freelance work. Everyone has at least one skill they can market. And you can devote as much or as little time to it, at the hours that suit you. Or you can simply go for a traditional part-time job.
Look at what activities and tasks you’re good at, and what you enjoy, and find a way to earn money doing that. This approach will mean it probably won’t even feel like work. And by starting with casual work on the side, you might just find a role you’d like to slip into once you hit FI.
So don’t discount this idea. It’s definitely worth experimenting with. Even if only for the purpose of testing the waters for later on.
As we can see, for all the hysteria, the economy is still growing, and our wages are still growing faster than inflation. Like always, our spending can be optimised to combat inflation and even lower our living costs, without dropping our standard of living.
It’s as good a time as any to shop around. For better mortgage rates, insurances and phone plans. We should question our current level of car use and commit to exercising more. And it probably wouldn’t hurt to trim down on eating out for a while (guilty!).
At the end of the day, saving more is always the fastest way to improve your situation, allowing you to build your investments faster and deal with any economic speed-bumps in the road with relative ease.
What are your thoughts on this topic? Let me know in the comments!