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Debt reduction is net wealth creation |
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Debt reduction is net wealth creation
Debt reduction is net wealth creation. We have recently been reminded by the RBA with their 3rd rate rise in three months that a debt needs to be repaid. The earlier we do it the more equity & hence net wealth we have. Why did the RBA increase rates? You could look at their commentary but we would humbly suggest that it is not the inflation that they suggest. We read that house prices are moving upwards & just maybe the RBA doesn’t want is a bubble in house prices. Let’s remember that amongst the many reasons for the GFC was the easy US Federal Reserve easy money creation which directed money into US houses. Then we had a 40% to 50% fall in US house as they can only be ‘flipped’ so many times.
Hence the RBA attitude to reducing this bubble & who says they have stopped. Our sharebroker suggests that the neutral target for the RBA is 4.25% which means that a mortgage maybe around 6.25%+. Another commentary suggests 5.5% % which means 7.5%+. Of course as we have also seen the banks may, sorry do, want to protect their profits & hence may, sorry do, raise their rates by more that the RBA increase. The banks do have a point as their wholesale rates are costing more. What we are seeing is that savings now are a scarce global commodity & hence with scarcity comes price rises. There is another comment that the next GFC maybe caused by governments due to their debt levels. the big lies are told by the big guys 7 who is bigger than the banks & the governments. Hence we may see Wayne & Sharon wagging their fingers at the big banks. We don’t believe we will see the industry super funds selling out of their bank shares.
So when you have a large debt then it needs to be paid off sometime. However we comment that many need to use their super to pay down their mortgage when they retire. When the average mortgage is now 367K then they may have no option. Many of course argue that they will downsize when they do so. Let’s not forget the costs in doing so. We clearly recall a client after selling his house & being upset at the 25k that the agent received & who didn’t want to know him after the house went unconditional. And that is only one cost. Government always needs its bit in Stamp duty. All this means that on retirement you have less capital & income than you want. Yes just maybe you live in the ‘Bushtracker’ & do the gray lap for the next 20 years because you need to.
The RBA would also be aware that Australians live in the largest houses in the world & Australia has the 2nd highest level of debt in the world.
All of this means that it is now time to reduce the family debt. When is a good time?
The GFC was all about ‘deleveraging’ which is debt reduction by business in particular. Certainly the consumer is also doing their bit in slowing down growth in credit card debt but still there is $42 billion on them in Australia. Any credit card debt means you are earning insufficient or you need to spend less.
We must also remember that we need a million to retire on. The home doesn’t produce any income. As ‘Rich Dad Poor Dad’ clearly explained ten years ago a home is not an asset as it doesn’t produce an income. It is an asset on the banks’ books which means it is a liability on yours.
We repeat that debt reduction is net wealth creation. This can only be achieved through discipline & the correct structure. It means paying the mortgage first as that is your largest challenge. It means living on your defined budget. It means switching debt from ‘bad debt’ to ‘good debt’ or non deductible to deductible debt as an intermediate step. The next step is into wealth creating assets to build toward that necessary one million.
We welcome your booking or email or phone 07 3848 1088 as our active wealth strategy maybe just what you & the family need. We are not mortgage brokers or bankers or real estate agents & our strategy works when actively managed & understood.
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Retirement Planning 