Barefoot Reader Mailbag

I COPPED a fair bit of flak a few weeks ago for comparing my golden retriever’s ability to pick the future to that of Australia’s best economists.

Their charts couldn’t explain why we were being ‘cautious consumers’ — slowing spending and increasing our savings. After all, unemployment is low, and Wayne Swan says everything is A-OK. Then global share markets had their biggest falls in a couple of years.

Give a dog a bone.

Obviously people are getting nervous and that always shows up in the Barefoot mailbag, so let’s take a look:

“Hi, Barefoot. I’ve been really spooked by the share market drop, but most of the commentators are saying that everything should be OK because of our proximity to China. What are your thoughts?”

I think that China (and to a lesser extent India) is the investment story of our lifetime. We are the lucky generation that gets to exploit the changing of the economic guard, and for those with a long-term horizon and enough sense to stay invested it’ll make us (proportionately) some of the wealthiest people on the planet.

Yet I also think that our politicians use the China growth story as the ultimate cure-all to justify all sorts of stupid policy decisions (and indecisions). The fact is that China is still an export-led economy, and its major customers, the US, the UK and Europe, are all struggling under a mountain of debt.

In the short term that’s going to have an impact on China, and therefore us. So expect more wild swings on the share market in the meantime.

“I don’t know why people even listen to you. You’ve been attacking CHOICE’s One Big Switch campaign, which is helping us stand up against the banks and pressure them so we can all get a better deal. Other than you being jealous, what’s wrong with that?”

I’ve copped a heap of criticism this week over standing up to CHOICE and their One Big Switch campaign.

The rest of the press basically rewrote the CHOICE press release. Some called their group buying campaign ‘a world first’, while others gushed that ‘it was a way to get everyday mums and dads millionaire rates’.

Except that it was all a bunch of rubbish.

The idea that you can ‘group buy’ a home loan for thousands of people is ridiculous. Anyone who has applied for a mortgage knows the bank determines your rate by taking into account your personal income, equity and credit history.

The real story, which no-one picked up on, is that consumer group CHOICE has sold its soul. Last month CHOICE warned consumers against “dollar draining commissions”. This month they joined forces with a slick sales outfit to share in potentially millions of dollars in commission kickbacks that the banks will pay them for each punter they put through.

Consumers know the finance industry is crooked, and that’s why they look to organisations like CHOICE to give them independent information. But with this sleazy stunt, CHOICE is now not only part of the problem – it’s on the payroll.

With the deal yet to be done, there’s still time for them to save face and do the right thing by the consumer. Let’s wait and see.

“I’ve just turned 30 and I’m still driving around the same car I had when I was on my P’s – a 1990 Corolla. I feel it’s time to grow up and get a new car. I’m thinking a Golf, but I’d have to get a loan. What the best rates on offer?”

There’s nothing more grown-up than owning your car outright. Besides, I think it’s really cool when I see someone with their head screwed on, driving an older car – it shows they have their priorities in order.

But I also understand your desire of not wanting to drive around a car that homeless people may mistake for a bed. Here are a couple of rules of thumb that can act as a financial seatbelt when you’re on the car hunt.

The value of your car should never exceed half your annual income: so if you’re earning $50,000 don’t buy a $30,000 car. Keep things in balance.

And don’t borrow: the cost of the money you’re paying back is rising, while the value of the car is falling. A better option is to buy a good second-hand car you can afford, continue saving, and trade your way up when you can afford to get a better second hand car.

“I’m not afraid to say that the stock market scares me. My wife and I don’t have a lot of super. I made the decision to switch both our super investments over to cash – I’m 50 and my wife is 44 – have I done the right thing?”

No, I don’t thing you’ve done the right thing. By moving to cash you’ve locked in your losses, and limited your future upside. (And there’s about thirty years of ‘future’ for you and your wife – hopefully more).

Many super funds have part of their dough invested in defensive assets: toll roads, airports, electricity companies – and other vital pieces of infrastructure that generate steady, reliable, profits.

Some super funds own these assets outright, rather than owning a share of them on the market, which means their value is less likely to bounce around like an 18 year old at a rave party.

Not sure if your super fund has these defensive assets? Call them and ask.

“I have been trying unsuccessfully to get on top of my debts. I owe around $8,000 on a personal loan from a holiday I took a couple of years ago, $9,750 on a car loan, and a couple of credit cards totaling about $11,000. I’ve been speaking to people about consolidating all of my debts. What are your thoughts, and what’s the best option?”

Early on in my career I had a bloke in his twenties come to see me who had $15,000 on various credit cards. He’d gone to see his bank, and they suggested he consolidate his sky-high credit cards into a low interest personal loan with set repayments.

He wanted the magic wand approach, and he certainly got some fairy dust. Last year he emailed me wanting advice on bankruptcy. He was now in $47,000 in the hole that he couldn’t repay.

He changed the figures, but didn’t change his behavior. Debt consolidation is a little like going to Jenny Craig, it all looks good in theory, but reality (and Krispy Krème), are an entirely different matter.

People who have lost large amounts of debt or fat, and have kept it off have one thing in common – they changed their attitude, got angry enough at their situation, and decided things had to change.

Your debts are really just the symptom of your real problem – the fact you continually spend money you don’t have. It’s as true for you as it is for the United States government.

Tread Your Own Path!