Take grand advice out for a road test

Old-fashioned tips for the grandkids are mixed bag of right and wrong

Illustration: John Tiedemann WE have a big extended Koch family dinner every month at Mum’s house. It’s big (26 at a long table), it’s loud – but it’s great fun.

Our grandkids were talking about their pocket money and asking advice on what to do with it. Gee we felt old. But it did remind us of the advice we received from those wise family financial sages … and question whether those pearls of wisdom are relevant today.

So lets stress test some of granny’s ageless advice and see whether it still stacks up today.

CUT YOUR COAT ACCORDING TO YOUR CLOTH – OR DON’T DRINK CHAMPAGNE ON A BEER INCOME

Both mean the same thing … don’t live beyond your means.

It’s advice that is probably more relevant now than in the past because of the easy access to credit and cheap interest rates. So many people dig themselves into a financial hole because they want instant gratification and buy things they can’t afford.

But we have to say the falling use of credit cards and the growing popularity of debit cards means many people are getting the hint.

WATCH THE PENNIES AND THE POUNDS WILL FOLLOW Grandma was of course living in a pre-decimal currency era and “watch the cents and the dollars will follow” doesn’t have the same ring to it.

Anyway, the basis of the advice is that if you’re careful with the little financial decisions the benefits will add up. Great examples are things like making your own lunch instead of buying it, and saving that $5 a day, which equals $25 a week or $1300 a year.

Turning the heater down in winter to save electricity, limiting time in the shower to save water, buying groceries in bulk all save little amounts which add up over time.

So, again, granny was right. Thankfully, in our relationship, Libby not only gives this advice but lives it.

BUY YOUR OWN HOME BECAUSE RENT IS JUST WASTED MONEY

Mmmm … maybe. The cost of renting a house over the same period it would take to pay off a mortgage can be expensive and, at the end of the day, you don’t own the asset. But we can give you a very good financial argument for renting and then investing the difference between the rent and the lower mortgage payment on an equivalent property. The key is the discipline of investing the difference rather than spending it on lifestyle expenses.

BORROWING MONEY IS EVIL Not always. There is good and bad debt.

Bad debt is when credit is used to buy a consumable item which disappears or rapidly depreciates. Borrowing for luxuries like fancy clothes, an up-market boat or car is bad.

Good debt is borrowing to invest in an asset which appreciates in value to build wealth and a long-term investment portfolio. In this era of low interest rates, borrowing to invest in quality assets can be attractive.

So Granny is half right.

DON’T TRUST THOSE BANKS, IT’S BETTER TO KEEP YOUR MONEY UNDER THE MATTRESS FOR SAFETY OK,banks aren’t known for their generosity, and savings interest rates are really low, but they’re still better than nothing, which is what you’d earn on money under the mattress.

As for security, Australia’s banks are among the safest in the world. So Granny, enough with scaremongering.

BRICKS AND MORTAR NEVER GO DOWN IN VALUE Obviously Granny hasn’t lived in south east Queensland, parts of Victoria, Perth or the US and Europe.

Property goes through up and down cycles like any other investment and needs to be approached with the same type of care and research. The big difference is that you know the value of your shares every day but with property a sale is the only time you know the real value of it.

Sorry Granny, times have changed.

IGNORE MONEY PROBLEMS AND THEY WILL GO AWAY When it comes to family finances, ignorance is not bliss. In the old days you could hide problems from the bank or be tardy paying bills without anyone really knowing.

But today sophisticated computers flag financial problems to banks, retailers, credit card companies and an array of other providers.

Financial blemishes are recorded on your credit rating and can stalk you for years, particularly after changes to the Privacy Act which allow more financial history information to be recorded on your credit file.