By Lacey Filipich BEng(Hons) MAICD
On Tuesday, the Reserve Bank dropped the official interest rate to 2% – an all-time low. On Wednesday, Joe Hockey sent out the message: now is a good time to borrow.
But is it really?
There’s no doubt it would be great for the Australian economy in the short-term if we all went out today and got a loan. Joe would certainly sleep better. More money means more spending, which stimulates employment and a bunch of other wonderful things we’ve taken for granted in this 20+ year period of growth.
It’s just not sustainable.
Australia has the highest rate of household debt vs. Gross Domestic Product (GDP) in the world. Since the Global Financial Crisis (GFC), we’ve continued to borrow instead of paying down debt – individuals and governments alike. We are still living beyond our means. Eventually, this debt has to come down, or at least stop growing at such a rate. We’re just delaying the inevitable by increasing our debt, and setting ourselves up for a bigger fall.
It is irresponsible for Joe Hockey to make a blanket statement like ‘go out and borrow’. Shame on you, Treasurer. Unfortunately this isn’t all that surprising from the man who recently proposed we should use superannuation to buy our homes.
Perhaps Joe could have said it better if he expanded the statement:
‘Now is a great time to borrow
if you can afford it and you’re borrowing for assets.’
An asset is something that puts money in your pocket. It is NEVER a good time to borrow for liabilities – those things that take money out of your pocket. Things like cars, computers and holidays are not what smart people spend their credit on… unless they’re beating their interest charges with solid, consistent investment returns.
Most importantly: now, more than ever, it is important to take your personal financial position into account before taking on more debt. Australia’s economy is in transition. The mining investment boom is over. Taking on debt in this environment is only a good idea if you can afford it, just in case you’re the unlucky recipient of a redundancy or simple firing. Think carefully before leaping.
That’s two strikes, Joe. If you were my personal financial advisor, I’d be firing you.
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Lacey Filipich is the co-founder and director of Money School. She helps parents raise financially savvy kids and helps adults get on top of their finances. Connect with her on LinkedIn and follow the Money School Facebook page to learn more.