03 Apr What’s the economy going to do?
Anyone who claims to know what the economy is up to is most probably full of it. There are so many factors at play. If we just look at the month of March, we have continued to see the fall-out from the Australian Royal Commission into Banking, the horrific Christchurch terrorist attack, uncertainty in the property market, more large construction companies getting into trouble, signs of increasing immigration, trade tensions between USA and China easing, numerous success stories in the small business sector and a multitude of other factors.
We aren’t going to try and predict what the economy is going to do over the next wee while, but history shows us that sooner or later, the worm will turn, and our economy will slow. Now, to be clear, we aren’t suggesting that this will or won’t happen, but if you fancy reading some doom & gloom about our Oz neighbours, have a read of this.
New Zealand is fortunate that it doesn’t have too much government debt (at least compared to other OECD nations). However, our households are a different story, at last measure our household debt to income ratio was 163.70%. Now, this isn’t the worst in the world, but its not too far off – For example, Oz is around 190%. So, heaven forbid, should the economy slow down (as we know it eventually will), we’ve got a big chunk of debt hanging over our heads to deal with.
So, if we know times are going to get tougher sooner or later, what can we do? Simple: make hay while the sun shines and prepare for when the economy isn’t quite so rosy.
Back to the above statistic, we have significant household debt. According to a survey by a credit ratings agency, 11% of kiwis feel comfortable with a credit card balance of over $10,000. Now, if this was a standard credit card with an 18% interest rate, and you made the minimum repayments without making any more purchases, it would take you 99 months (8 and a bit years) and you’d pay $9,662 in interest, before you paid it off. Got a fancy credit card? It will take longer, and you’ll pay more. Potentially a bigger deal are our mortgages. Current interest rates are about as good as they have ever been, but it wasn’t that long ago that mortgage rates were double digits.
So, what can you do? First off, make sure your debt is at manageable levels. If rates go up by a few percentage points, could you stomach it? If you’re not sure, check out the debt calculators on sorted.org.nz.
Next up, build up a ‘rainy day fund’. Having access to a bit of cash up your sleeve, Scott Pape (AKA the Barefoot Investor) refers to this as your Mojo account, because if you have access to a bit of cash, you will always have mojo.
How do you do those 2 things? It is simple (but not easy), spend less than you earn. I say it’s not easy because NZ runs a trade deficit. This means, as a nation, we import more than we export. Or put another way, collectively we spend more than we bring in. How much? Last year, it was $5.86 billion, which was an 11-year high.
So, we know that sooner or later (hopefully much later), things will get worse than they are now. Its up to you as to how you prepare.
