Myth-Busting Economics

A No-nonsense Guide to Your Money, Your Business and the Australian Economy

Stephen Koukoulas

• Publisher: Wiley
• Year: 2015
• ISBN:
  9780730321965
• Edition: 1
• Topic: Personal Development
• Subtopic: Personal Finance

A practical, easy-to-follow guide to understanding and responding to Australian economic trends

How does the fall in the Dow Jones or the rise in the Chinese yuan impact your personal finances? Using practical and real-world examples, Myth-busting Economics helps you make informed decisions for yourself and your business. Written by a leading economist, this frank, fact-filled, no-nonsense guide provides special insights into the Australian economy in Asia, commodity prices, housing affordability, the impact of an aging population on the economy, and much more. This book outlines the themes that people of all ages, incomes, and levels of wealth need to consider in the context of their personal finances. You'll get a better understanding of the key issues and find out how to fully prepare for the uncertainties lurking beneath the surface and you'll learn how to take advantage of emerging opportunities.

Economics dominates the news, but figuring out what is really important is no easy task. At last, this myth-busting book clears the air and gives you the facts you really need to be ready for the future.

• Learn what the economy means to you, your family, and your business
• Prepare for the coming economic trends now
• Understand what drives business through inevitable ups and downs
• Get a firm grasp on the major economic issues that impact your finances

Our lives are inexorably linked to the economy, but few Australians credit just how much economic trends affect their financial growth and security. Myth-busting Economics closes the gap in financial literacy and provides clarification and expert insight to help you navigate the road ahead.

chapter one
MASTERCHEF VS MASTER ECONOMIST

My motivations for writing this book include frustration and disappointment with the direction of national economic policy, the prevailing lack of financial self-awareness and the woeful state of financial planning in Australia. The reality is that many people have little understanding of their own financial status, let alone the high-brow economic policy contemplated and delivered by the government of the day. An equally worrying problem is the unhelpful and often counterproductive financial advice given to business, mortgage holders and those saving for retirement through their superannuation fund. This may sound like a harsh assessment, but as you work your way through the following pages, there should be a realisation that this assessment is correct: people are complacent when it comes to their own money and the big-picture policy settings that influence their financial wellbeing.

The problem of financial complacency

I'll start by noting that many Australians simply don't care about politics and, by default, economic policy. This is demonstrated by Australian Electoral Commission estimates that show some 10 per cent of eligible voters do not bother to register on the electoral roll. A further 10 per cent of people on the electoral roll don't turn up to vote at each election. Add to that a further 5 per cent or more who cast an informal vote. On top of all this, an unknown number register a formal vote only because they are required to and would be fined if they failed to do so. Despite this level of apathy, there are unending complaints from the community about the government of the day, whether Labor or Liberal/National Party Coalition. ‘They are all hopeless!’ is the all too common refrain. And often at the core of these complaints are the government's economic policies, whether implemented or merely promised.

This level of disengagement encourages politicians to pitch the economic policy debate at simple, hip pocket issues that voters are most likely to fasten on when they watch the 10- or 20-second grab on the evening news. Major economic policy reforms that set Australia up so well in decades past were debated, analysed and implemented for the medium- to long-run wellbeing of the economy, rather than being advocated and shot down in the interests of political point scoring, as is all too frequently the case now.

As for people being aware of their own finances, an Essential Research poll conducted in 2014 found that 52 per cent of people with superannuation savings paid ‘not much attention' or ‘none at all', or had ‘no idea' about the arrangements for their retirement incomes. The poll found that only 15 per cent of people paid ‘a lot of attention' to their superannuation arrangements. This is astounding, even for young people, given how important retirement incomes are for people who are living longer and want a better standard of living in retirement.

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Paradoxically, most people show little or no interest in their own finances, yet cost of living pressures dominate their concerns.

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An odd thing about this lack of interest in personal finances is the high profile accorded to cost of living pressures in the general community, particularly among older people. Paradoxically, most people show little or no interest in their own finances, yet cost of living pressures dominate their concerns.

This financial complacency sees people with superannuation savings not bothering to check the details of how their money is being invested or the fees they are being charged, yet they lament loudly when at age 50, 55 or even 60 they realise they will not have enough savings to fund a decent retirement.

The Australian Taxation Office offers the startling statistic that there are 4 million unclaimed superannuation accounts, holding $18 billion in total assets. This is an extraordinary illustration of the lack of knowledge and interest so many have in their own financial fortunes. It is hard to fathom why people would not bother to keep track of or chase up their own money. Laziness? Too rich to worry? Or is it that they don't understand how superannuation works and how easily they can track their wealth accumulation and retirement income, along with their ability to add to it throughout their working life even when they change jobs.

A simple lack of effort to understand superannuation seems to be the most likely cause of this financial neglect. It could also be that many have built up a reliance on the government to ‘fix things' when needed. In the case of retirement income, why should I bother if I spend all my money now and don't save for retirement, when I know there is a decent age pension to fall back on?

Government economic policy and personal finances are about money, wealth, wellbeing and comfort. Without money it is hard, if not impossible, to access a good education, good health care, a comfortable retirement — even, in more extreme although all too common cases, decent food, clothing and shelter.

Included in the broad category of personal wellbeing, of course, are issues relating to our environment and how the planet can sustain the 7.1 billion people currently on it, let alone the 10 billion or so predicted by 2050. Money, finances and wealth matters are the focus of this book. But I hope readers will be persuaded to take greater responsibility for their vote to ensure our politicians do things right, even if it involves each of us paying a bit more tax or paying more out of our own pocket for services. Over the longer run, good economic policy and good economic outcomes mean higher incomes and wealth for the whole economy. These benefits accrue, in large part, to you and me and directly improve our personal financial position. If we elect duds to federal or state government, and if we don't take an interest in what economic policies are implemented, we run the risk of missing out on a decent lifestyle not only now but into our retirement. This takes time, certainly, but a little effort in thinking about your economy can help to deliver high financial returns.

Think of it this way. It is mandatory for our teenage children to spend hour after hour learning how to drive competently, yet there is no requirement — or even much interest, I might say — to teach them about money, saving, debt, income and opportunity cost. Many people under the age of 25 have little or no idea about how to manage their money. Financial ignorance and a general indifference to money matters persist for most people throughout their lives. This helps to explain why, despite almost 25 years of strong economic growth in Australia, too many people still fall on economic hard times. Most people turn out to be good or excellent drivers as a result of the effort that went into teaching them. Most, unfortunately, have little clue about their finances or where all their money goes each week and wonder why they are unable to save enough for a comfortable retirement.

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Financial ignorance and a general indifference to money matters persist for most people throughout their lives.

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The reasons for this neglect of financial wellbeing are not entirely clear, given that the issues and coping techniques are relatively straightforward. Again, it is a bit like driving a car. Learning how to drive involves learning to pay attention, to watch out for the dangers and risks ahead. You learn the rules about what is safe so you don't speed; you don't drink and drive; and you maintain your car. The good news is you can still drive wherever you want and go 110 kilometres an hour on the freeway. Not bad. Barring the outside chance of an accident, you will be much better off for having learned how to drive, which allows you not only to get from A to B, but to do so in the safest possible way. If you learn the ins and outs of finance and pay attention to the rules that surround savings, investment and spending, then, barring an accident, you are likely to achieve financial security. With financial knowledge, you are less likely to be ripped off or to end your working career without adequate savings. And you are more likely to take actions that save money, such as negotiating a lower interest rate on your mortgage or lower fees on your superannuation, both of which are money saved.

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If you learn the ins and outs of finance and pay attention to the rules that surround savings, investment and spending, then, barring an accident, you are likely to achieve financial security.

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Planning, preparation and enthusiasm — an analogy

In examining why so few people bother to take more than a cursory look at their finances, it is instructive to consider an illustration that might at first seem at an odd tangent from a discussion of economic policy, finances and financial planning.

In recent years television has produced a boom in wonderfully entertaining cooking shows. One is the Ten Network's Masterchef. In this show otherwise ordinary people with a lot of interest, and possibly a bit of talent, use their skills and knowledge to cook what are often weird and wonderful meals. They do this with direction and advice from some of the best chefs in the world.

Often the contestants do a remarkable job. Sometimes they match the finesse of Heston Blumenthal or the flair and creativity of Gary Mehigan. The contestants' sense of euphoria and accomplishment when they cook a great dish that the judges enjoy and rank highly is palpable. But more often than not these incredible highs are not realised; the wannabe chefs fail to cut the mustard and their dishes are judged to be merely so-so.

There is drama when the truffle-infused beetroot risotto is overcooked and gluggy, or when the duck breast turns out to be raw inside despite the crispy skin. Sometimes the contestants are too slow at ‘plating up', forget to drizzle the jus or misjudge the seasoning of the quail compote. These mistakes cost them dearly when it comes to qualifying for the next round or gaining that all-important immunity pin. But the judges, the masterchefs themselves, are there to guide the contestants on what went wrong, making sure that the next time they step up to the hot plate, their earlier mistakes are not repeated.

We might apply the Masterchef principles regarding effort, teaching and learning, and even entertainment, to our own economics and finances. There are, or at least there should be, similarities between planning for and preparing a meal and planning and preparing a business plan or investment decision. We know that every day businesses fail despite the best efforts and endeavours of those involved. Business results will often fall well short of the principals' objectives and dreams. This is because the people running the businesses and making the investment decisions are not the equivalent of the TV masterchefs.

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There are, or at least there should be, similarities between planning for and preparing a meal and planning and preparing a business plan or investment decision.

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Despite the crushing dismay of the contestants who are sent to the elimination challenge, in the real world a dodgy apricot chicken dish really doesn't matter all that much. For those who get through to the next round there is always tomorrow night to attempt to cook that restaurant-quality meal. When contestants do coo...

Table of contents

• COVER
• TITLE PAGE
• COPYRIGHT
• ABOUT THE AUTHOR
• ACKNOWLEDGEMENTS
• PREFACE
• 1 MASTERCHEF VS MASTER ECONOMIST
• 2 YOUR ECONOMY
• 3 YOUR HOME AND MORTGAGE
• 4 YOUR BUSINESS
• 5 YOUR SUPERANNUATION
• 6 YOUR GOVERNMENT
• 7 YOUR RESERVE BANK
• 8 YOUR FAMILY
• 9 YOUR TOUGH DECISIONS
• 10 YOUR FUN
• 11 YOUR NEGATIVE GEARING
• 12 YOUR WORLD
• AFTERWORD: BEWARE OF ADVICE AND BE FLEXIBLE
• INDEX
• ADVERT
• EULA