I haven't written about any personal finance topics in awhile, all thanks to my course structure. Anyway, it was quite the semester I anticipated. At least I knew what I was getting into and the consolation was I didn't freak out that often. I have a well deserved break now and here's one of the first few things I am doing.
I did some really interesting subjects this semester and although I went through quite a tough time doing them, I walked away quite happy. Hopefully I could somehow part some of the things I've learnt and make my writings better.
I've been wanting to write about this topic for a very long time and I finally have the time to. Robert Kiyosaki wrote about how every single person should understand the 4 factors. If they didn't they would never improve financially. He wrote his books particularly to help the Americans, whose financially well-being has been below par. But the rest of the world benefited too, people like me. He wrote about the 4 factors that made people poor. And I really felt the same after reading it and I thought it would be important to spread the message. Since he wrote it in an American context, I thought probably I could do one for an Australian's perspective.
The 4 factors by Robert are Taxes, Debt, Inflation and Retirement. He mentioned the majority of the people heard of these words before and knew what they generally meant, but they didn't know the impact of these four factors. The reason that convinced me to write on this topic was because these four factors took the most money out of people, legally. For the working class, what is the percentage these four factors take from your gross pay check? If it is below 20%, then I think you shouldn't be worried. But if it is anything above 40%, I think it is important to take note.Just imagine, before you can spend ANY amount from your pay check, 40% is ALREADY GONE. Some people just accept it and carry on with life as usual thinking they could do nothing about it, but for the people who believe something can be done and look at ways to improve their situation, they could be on their way to saving lots of money by just doing things not much differently.
First of all, I would briefly cover the four factors and some important points to note. It would take an entire book to give a comprehensive guide. What I hope to achieve is to point things to the right direction and hopefully by taking your own initiative to understanding these four factors further, you could improve financially.
*Half way through typing this, I just realised this post would be too long. So I am writing the factors in 4 parts (posts).
Inflation
The first factor is Inflation. Definition, a rise in prices in just about anything. You and I hate inflation because we have to pay more for our bills. We dislike paying more for fuel, groceries and it makes any future investments more expensive because prices keep going up. Inflation hurts the value of our money because 1 dollar today might not buy you the same thing one year later. A brief economics explanation. A rise in price is generally due to a fall in supply or an increase in demand. So which way is it? I would say both factors are evident. A fall in supply seldom occurs unless we're talking about a resource with limited supply, but a growth in demand I would say is due to economic and population growth. In short, if there's growth, there is inflation.
Australia is one of the handful number of countries in the world with a positive a 'real interest rate'. A simplified calculation is the Interest Rate minus the Inflation Rate. If it is positive, it means money is still outgrowing inflation which is still good, vice versa. If it is positive, do Australians still need to worry? The answer is yes. And the next question is obvious, it is why?
One of the reasons is if interest rates are at 4.5% and inflation is at 2.5%, you're looking at a real interest rate of 2%. Especially for people whose interest payments keep them afloat in retirement and people who hold mainly cash, 2% is a below average return. Inflation is also known as a 'silent tax'. It takes money from you without your "permission". For example, oil prices rise, you pay more at the pump, no questions asked. The pump owner sure didn't keep prices down to please customers, simply because people will pay it anyway. What if oil prices go crazy to levels back in July 2008, you would have no choice again but to "surrender" more money for fuel.
The effect of rising energy prices is huge, it trickles down to almost every section of cost of living. From housing, food, transportation and wages. Inflation destroys an economy if it is not kept in check. Growth becomes pointless if inflation grows faster. The central banks increase interest rates to curb inflation, but high interest rates is not necessary a good thing, ask borrowers that.With high interest rates, cost of financing increases and growth slows as well.Inflation threatens our cost of living, so who benefits and what can we do?
When it comes in inflation, only a small group of people in the world benefits. People who own resources/real assets. When oil prices rise, only oil producers benefit and the rest of the world loses. People who own real estate, they don't mind if house prices rise because they would gain. Imagine the wealth transfer. People who don't own any real assets, have their wealth transferred to people who do. In Australia we're talking about a huge mining boom, but how much of that wealth is actually transferred to the general population. If you don't own the mining companies, you don't benefit. If you're waiting for the government to make sure the benefits are spread across the country, this would awhile and I'm not sure how much 1 person would receive after dividing it among 20+ million people.
Inflation can a big problem, especially for people who do not own real assets. The solution is simple, you can own more real assets, earn more money or achieve a higher return on your investments. In the long run, earning more money at work is going to be difficult and achieving a growth in returns over time gets harder. Therefore, owning real assets would be the best option.
In short, inflation happens if growth occurs. As individuals, what happens to prices is out of our control. But the fact is we know inflation will happen and just by looking at inflation data for the past few years, we know inflation will not stop happening. If inflation is controlled well within comfortable levels then it is fine, but if it takes a few spikes many people will suffer. As individuals there are no certainties in economic conditions. Although Australia is a big producer of commodities, the benefit to the country as whole is only concentrated to the people who own these resources. If the price of coal or gas goes up, the owners make more money and our bills get bigger numbers. To deal with this inflationary environment, the best thing in my view to do is to hold inflationary assets; assets that benefit from inflation. I am not saying go get a house or buy stocks because everyone's financial position is different. What is best for yourself is look at the assets to you have, anticipate inflation and see whether you would be better off, worst off or maybe be unchanged. If there's room for change then make some changes in your allocation.
The next few topics would be more linked to an Australian's perspective. Inflation is a bit general to everyone so I haven't got anything specific. Hopefully the next few posts will make up for it. Thanks.
~deyao~
