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Superannuation returns drop + the magic of compounding
My Money Digest - 10 May 2024
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Hi everyone from beautiful Sicily,
After a week with our youngest daughter Georgie in London we flew to Sicily to catch up with a group of friends. We’ve known them for over 30 years and we’ve taken trips together for 20 years. It is pretty special as we all met when our kids went to the same primary school. We were that group of parents who organised fundraisers like trivia nights, bush dances and kids’ discos.
Who would have thought we’d still know each other, let alone travel together, all these years later? Out of the six families we have a combined 49 grandchildren.
Sicily has been fabulous. I had no idea about the Valley of the Temples in Agrigento, the mosaics of Villa Romana del Casale or the beauty of Noto. A lot more to see over the next week as we continue to drive around Sicily and then spend a few days in Malta.
But while I maybe enjoying Sicily, I’ve also been keeping an eye on the important money issues you need to know about.
This week:
RBA keeps interest rates on hold but adjusts its inflation and unemployment forecasts
How to ease the pain of higher-for-longer interest rates
Superannuation returns drop on the back of a volatile sharemarket
Teach your kids the magic of compounding
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RBA keeps rates on hold but changes forecast for taming inflation
As expected, the Reserve Bank this week kept the cash rate at a 12-year high of 4.35 per cent for a fourth straight meeting. But, after the recent disappointing March quarter CPI, even the RBA is starting to revise its own inflation forecasts, pushing out when it expects a drop to within the 2-3 per cent target range.
The RBA Board maintained much the same wording in the accompanying statement as from its March meeting… a neutral stance… saying it was ruling nothing in or out on future rate movements. The fight against inflation remains the RBA’s biggest priority.
As I’ve been saying for months, I don’t expect another rise in rates but I don’t expect rate cuts anytime soon. What you see is what you get, I believe, until next year.
It seems the RBA might be thinking the same. It has now pushed out its forecast for inflation to return to the 2-3 per cent target band until late 2025. And it doesn’t expect any cut to rates until mid-next year.
The RBA's economists now expect annual headline consumer inflation, which was growing at 3.6 per cent in the March quarter, to accelerate to 3.8 per cent by June and stay there until the end of the year. That’s a major change to its previous forecast of slowing to 3.2 per cent by the end of 2024.
The RBA also predicts the jobs market to stay relatively strong with the unemployment rate to climb to 4 per cent by June and 4.2 per cent by December – lower than the previous forecasts of 4.2 per cent and 4.3 per cent.
This week’s statement did make reference to the higher-than-expected March CPI: “Recent data indicates that, while inflation is easing, it is doing so more slowly than previously expected and it remains high.”
Cost of living and interest rates are worrying homeowners
Almost a quarter of homeowners are worried they’ll have to sell, or have already sold, due to the rising cost of living.
According to a new Compare the Market (where I am Economic Director) survey, most homeowners aren’t worried about having to sell (79 per cent), but a startling 39 per cent of renters fear their landlord will have no other choice… and potentially leave them homeless.
This comes as SQM Research revealed the number of residential properties sold under distressed conditions in Australia has risen to 5,252, reflecting a 2.4 per cent increase.
This is the domino effect following the fixed rate cliff. Many people’s savings buffers have been depleted, and now they’re struggling to meet repayments.
But a forced sale is really the last resort – most homeowners will fight tooth and nail to hold onto their properties.
We know tax cuts are coming in July, which should provide some relief. Any cut to interest rates will also help ease the pain of homeowners.
When interest rates fall, property prices are tipped to increase even further, so that’s something homeowners should be aware of as well.
But borrowers need to be proactive and make sure they’re on a low rate now. Some people could be paying hundreds extra per month because they’ve rolled off a low front-book rate (which they received as a new customers) onto a high back-book rate.
If you’ve been with your lender for a while, there’s a strong chance you’re on a high back-book rate.
Compare the Market analysis of some of the rates available from the big four banks showed the average difference between front-book (for new borrowers) and back-book rates (for existing loyal customers) is a whopping 1.96 per cent.
That’s equivalent to eight RBA rate cuts of 0.25 per cent.
Therefore, a person with an owner-occupier $750,000 loan could be saving $1,008 a month when they switch from a rate of 8.54 per cent to 6.58 per cent.
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Source: Compare the Market
If you can’t refinance to a lower rate because you no longer meet eligibility criteria, have a crack at negotiating your own rate cut with your current lender.
Find the lowest rate your lender offers and ask them to match it. Homeowners should always be sceptical of their current interest rate and use websites like Compare the Market to make sure it's competitive.
Five ways to ease mortgage stress
1. Try to negotiate a lower rate
Just one in three Aussie mortgage holders have tried to negotiate a lower rate this year, according to Compare the Market research.
Amazingly, 70 per cent of those that called their lender said they were successful in securing a discount. It shows a simple phone call could end up saving you thousands.
2. Consider asking your lender for financial assistance
But if you’re still struggling to meet mortgage repayments, ask your lender for support. This could include special payment plans, fee relief and rate concessions.
If you’re concerned, don’t try and hide and think your lender won’t notice. They want you to talk to them about what support might be available and to work together on a plan.
3. Switch to interest-only repayments
Switching to interest-only repayments is one way to temporarily lower your repayments. While banks typically don't like giving owner-occupiers interest-only home loans, they are usually willing to work with you through the tough times.
People on interest-only loans don’t pay anything off their principal, may face higher interest rates, and face a greater risk of negative equity. That said, if you’re struggling to meet your repayments, switching to interest-only may help you keep your house.
4. Request a longer loan term
If you've had your home loan for five years or more, you could ask your bank to reamortise your loan over a new longer period.
Lenders need to weigh up a number of risks to decide if you are eligible for this. There is also a fee you usually pay to reamortise your mortgage. The fee varies from lender to lender, ranging from $250 to $500.
While this is one way to gain immediate relief, prolonging your mortgage means you’ll pay thousands of dollars more in interest over the life of your loan. If your financial situation allows, you can switch back to a shorter loan term to save in future.
5. Access free financial debt counselling
The free National Debt Helpline offers advice to people struggling with bills, fines, and repayments. They can help you develop a budget, and explore different options, and advocate on your behalf to other creditors. Contact the helpline on 1800 007 007 (Monday to Friday, 9.30am–4.30pm).
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April was a pretty ordinary month for share returns which were impacted by economic news around higher-than-expected inflation leading to forecasts of higher-for-longer interest rates.
As a result, superannuation funds in April reported their first negative monthly return since October 2023. Leading superannuation research house SuperRatings estimates that the median balanced option fell by 1.6 per cent over April.
But to put it in perspective, funds are still up over 7 per cent for the financial year with two months remaining.
The median growth option fell by an estimated 1.7 per cent for the month, while the median capital stable option, with a higher allocation to defensive assets fell by a more modest 1 per cent.
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Source: SuperRatings estimates
Pension returns similarly fell over April, with the median balanced pension option falling by an estimated 1.9 per cent, the median capital stable pension option is estimated to have fallen by 1.1 per cent while the median growth pension option is estimated to fall 2 per cent.
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Source: SuperRatings estimates
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The top money tip to pass onto your children
The average Australian kid is getting $26 per week in pocket money but parents could turn this into $50,000 by the time they turn 21 with one simple trick.
A survey of 1,010 Australians in March found the average Aussie child had a weekly allowance of $26 a week, or roughly $1352 a year.
Assuming you start as soon as the child is born, putting that money into a savings account with an interest rate of 5.5 per cent could see their savings grow to over $50,000 by the time they turn 21.
After 10 years, they would have $13,520 in regular contributed deposits and $4,470 in interest, but this money accumulates and grows exponentially.
In 20 years, you could have $27,040 in regular deposits and $22,093 in interest.
The cost-of-living crisis has opened our eyes to the importance of early education in financial literacy. Pocket money is a great way to teach kids about the importance of saving up for their future and demonstrating the impact of compound interest can be a great incentive.
I like to think of compound interest as ‘free money’ because it's when the interest you earn on savings begins to earn interest on itself. Whereas if you put $26 per week into a piggy bank – it's not going to compound and accumulate interest; it's going to be devalued.
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Top tips for parents teaching kids about money
1. Educate them on the difference between want and need
Sometimes it can be hard to differentiate between what people need, such as healthy food or sensible shoes, or want, such as snacks at the movies and a pair of fancy shoes.
2. Teach them how to budget
Once they have an allowance or an income that’s coming in regularly, sit down with them and help them budget that amount. A simple budget that they can get started is a version of the 50/40/10 budget rule, where they save 50 per cent of their income, spend 40 per cent on necessities and spend 10 per cent on things they want.
With our kids we had a rule where 50 per cent of pocket money had to be saved for a particular goal (savings for savings sake is pretty boring), 40 per cent could be spent and 10 per cent had to be donated to a charity of their choice (which we usually matched dollar for dollar) to make them all aware of our responsibilities to community.
3. Don’t be hard on them when they make mistakes
Everything is an opportunity to learn and grow. The only thing you need to make sure is that they know where they went wrong and find ways to make sure it doesn’t happen repeatedly.