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October 2009 Newsletter Edition 4
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As you can see all these products are fairly stable products that are all likely to still be available 30 years from now.
Once a year I plan to buy the same products on the same day from the same shopping centre. Then I can track my own inflation. This is to see if the government and my inflation on the 34 products run at an similar rate.
These were purchased on 21 Aug 2009. If inflation was running at 3% between now and 21 Aug 2010 this shopping bag would cost $197.32
For example:
At 0% it will cost= $191.58
At 1% it will cost= $193.49
At 2% it will cost= $195.41
At 3% it will cost= $197.32
At 4% it will cost= $199.24
At 5% it will cost= $201.15
At 6% it will cost= $203.07
Why is this important? Let’s pretend you have been working for the same employer for 10 years. Each year they reward your hard work with a 3% raise. If inflation is running at 3% your money has the same buying power as it did last year and the same buying power as it did ten years ago. This means that it cancels out any benefit from your raise.
That means that you could have effectively been working at the same place for the same money for ten years. Now when I talk about money, of course you are earning more, but it has the same purchasing power.
You would need to get a 4% raise in order to start getting ahead. Every time you get a raise you should not think about it in terms of dollars but in terms of what percentage that is. Also consider what inflation is running at for that year.
Putting it in a different way, let’s pretend you are at school and your teacher gives you a test. You study for the test and get an A+. However the teacher is tightening his standards on the next test the following week. If you put in the same effort you will only get an A-. So you have to work harder to get the A+.
This is similar to inflation. If you don’t get a pay rise for two years and inflation keeps going up (as 90% of the time it does) your money will have less purchasing power.
Let’s look at real figures. From Jan 1st 1998 to Jan 1st 2009 inflation has been running as follows.
2000 2.5%
2001 3.1%
2002 3.0%
2003 2.4%
2004 2.6%
2005 2.8%
2006 3.3%
2007 3.0%
2008 3.7%
Let’s take the example of Fred. Fred is a bus driver who took up his job on Jan 1st 2000. This was at a starting salary of $35,000. Fred is a model worker who has been an excellent driver.
Each year his company rewards Fred with a 3% pay rise. In fact by 2008 he is earning $44,336. This is a 27% increase from his 2000 wage.
However inflation has gone up by 29% (Please note this is a real figure). What this means is that if you purchased a bag of shopping in 2000 for $100 it would now cost you $129.00. As you can see, Fred is actually behind the 8 ball. He is earning less now than when he started. No not less money, but less purchasing power. Fred’s company values Fred less now than when he started, as far as what Fred could purchase with his money!
Even though Fred has been a model worker, his company has gotten away with only giving him pay rises that are LESS than inflation.
The moral of the story is that when your work gives you a pay rise how does this sit with inflation. Are they giving you any more PURCHASING POWER? Or are they only giving you the same purchasing power going forward? Or are they giving you even less!
This is an extremely interesting subject. My advice is that you should work out what amount of money you have been getting paid since 2000. If you are not getting paid 29% more in 2008 than 2000 you are actually going backwards.
Inflation in bank accounts
Let’s pretend you have saved $100,000 on Dec 31st 2007. You want to put it in a term deposit bank account to earn some interest. You find a one year term deposit that is paying 5%. Wow you think, I can earn $5000 just by leaving my money to sit.
Are you really earning $5000 on your money? Yes, in real terms you are, however you must take inflation into account. As we know, in 2008 inflation was running at 3.7%. This means that your purchasing power has gone down by 3.7%. Meaning that if a bag of shopping cost you $100 on Dec 31st 2007 it would have cost you $103.70 on Dec 31st 2008.
So let’s look at this as a maths figure
Jan 1st 2008 $100,000 in a term deposit at 5.0% interest
Dec 31st 2008 $105,000 in a term deposit
But in purchasing power we need to subtract 3.7% from the total figure to give us an amount of $101,115.
To make this scenario easy to understand the following statement is true, “While you have $105,000 in real money it could only purchase what $101,115 could have on Dec 31st 2007. To put it frankly, you have only grown your purchasing power by $1115 at Dec 31st 2007 prices.”
And guess what this does not even take into account taxes that you have to pay on the interest.
Let’s say for example this person that has saved $100,000 currently, at a job where they earn $50,000 a year before tax. The government no longer taxes them at $50,000 a year. The government now charges them as if they had earned $55,000. They consider the interest of $5000 part of their wage.
Wow, your purchasing power has been eaten into again as the goverment will want to tax you more!
I will keep you updated once a year as to my 34 shopping goods so you can see if it lines up with inflation.
I have quoted from one of Warren Buffet’s (the world 2nd richest man) sayings. Please note I had to read this saying quite a few times before it stuck, however it does make extreme sense:
“It makes no difference to a widow with her savings in 5% passbook account whether she pays 100 percent income tax on her interest income during a period of zero inflation, or pays no income taxes during years of 5% of inflation. Either way, she is taxed in a manner that leaves her no real income whatsoever”.
If anybody has any stories on this I would love to hear them. mrhomebudget@gmail.com
Additional saving tips
OK the world economy is a mess at the moment. One of the industries that have been hardest hit is the banks. They have had to take losses from customers who have not been able to pay back home loans, credit cards, car loans and personal loans.
This presents an opportunity to you. Have you ever asked your bank for a discount off their current level of interest they charge you? I have a friend who works in a bank call centre. He says that they have guidelines on what to do when people call up and ask for a discount. He once told me that he dropped someone’s home loan interest rate by 0.40%. All because they rang up and threatened to go to a different bank with a more competitive rate.
Now a less than 1% rate drop might not seem like much.
However let’s pretend that you had a $300,000 mortgage at 5% over 25 years. You call the bank and they give you 0.25% off “just for asking”. If you continue to make the minimum monthly payments over the next 25 years you will save a total of $13,025.41 in interest. If you manage to squeeze out the additional 0.15% as talked about in the above example then you would save $20,759.69.
This is all for just asking the question. Plus you can do this over all your debts. Also if you don’t get the answer you want from your bank, shop around. Nowadays it is easier than it has ever been to change from bank to bank.
The savings from this could be huge.
Inspirational Storys (Catherine Spicer)
This week I have the pleasure of interviewing Catherine Spicer. Catherine has written a book that is all about saving money at the supermarket. She has saved around $100 a week feeding her family of five through using her methods and recipes.
Catherine, a former Pacific Islands aid worker, lived in Fiji for two years helping their population. This opened up her eyes to how much westerners use and waste.
In fact she has even started her own charity, ‘The Tool Power Project’. Catherine’s book, which is entitled using the catchy name “Going off your trolley”. With the catch phrase being, “Need a trip to Fiji? Then Stop Shopping!”.
Catherine’s book sells for the great price of $5.00 (for the eBook version) plus she is going to donate $2.00 from each book to charity.
Now let me say something. This is an extremely good price for a book. Let’s pretend that you read it and you only find one good idea to save money (even though there are a lot more than that).
And this one good idea saves you $50.00 a year. You have just paid for the book 10 times over in just one year. That’s a great investment. Plus it helps a great cause.
I have read it and some of the recipes look too nice to be a cheap meal. However, after looking at the ingredients you soon see that they are very cheap indeed. Also she has included a 2 week shopping list with prices for each item on the list.
As you all know, supermarkets take a huge percentage of our weekly wage. Even a small percentage saving off all your shopping can save you a huge amount. Let’s pretend you spend $150 a week and you decide that you want to save 15% to bring your spend down to $127.50. This is a yearly saving of $1170. Very good savings, I would say.
For more information on the book, or Catherine’s charity please go to www.toolpowerproject.org
Catherine also supports a charity called ‘Look Good Feel Better’. This charity is a national program that helps people undergoing chemotherapy. Both charities receive $1 each from the sale of the book. Their website can be found at www.lgfb.org.au
Hello Catherine and thanks for taking the time to answer some questions.
Let's start off with some hard questions.
Why did you write the book, and how did you come up with the concept?
I wrote the book as I got tired of shopping at the supermarket and spending so much money for so little. There had to be a solution and that was to reduce shopping; so I came up with the list. If you are not shopping, you are not spending money! The other thing is, I wanted to cook homemade meals using real ingredients in my recipes and not all those premade sauce things that supermarkets keep pushing you to buy. I also thought that other people in Australia may be feeling tired of their shopping trips and that I may help them with this guide.
What are the best tips for our readers to save at the shopping centres?
Reduce your trips to the supermarket and plan your meals in advance. Go with a list of the ingredients you will need to make the meals, plus any other items you may need for at least 7 days. In your book you have some great recipes including, ‘Mighty Meatloaf with couscous and salad’ and ‘Red Thai Curry with noodles and coconut peas’. Now these meals might not cost a lot but do they still taste like a million dollars.
Everyone loves the meatloaf recipe. It is covered in a marinade when you cook it, so it is delicious. It is great hot or cold, especially with summer coming up. I have two fussy boys, well they are actually 26 and 18 and they drive me crazy sometimes.
They both love recipes with coconut milk so the Red Thai Curry is tasty but simple.
In the book you talk about a fortnightly dinner menu which will feed a family of 5 for a fortnight for only $99 a week. How is this possible and go into this in more detail?
Having a shopping list as the guide, it does eliminate the need to shop .You have all the ingredients for two weeks. In fact some ingredients are not used up in the first two weeks, therefore your shopping bill reduces down to under $90 if you carry on for another two weeks.
How did you go about doing this? Did you have to research and refine this two week menu?
The book took over a year to put together so there was a lot of testing. The quantities had to be right as well. I had seen lots of recipes on the back of pasta boxes and I thought NO WAY would that feed a family of five, so when I did my recipes I wanted them to be realistic. As you could imagine my family are a bit tired of my recipes, so I am still creating new versions.
At the end of the book you talk about starting your own herb garden. Can this save you money and how did you come up with this?
From my experience using some dried herbs works well, but not herbs like parsley or coriander. So I saw that you could start a herb garden from a bag of potting mix by just poking holes in it and planting the herbs. It does not require much space and it works as long as you water them.
How about a cheap recipe for our readers?
Creamy chicken with rice. Feeds a family of 5. Costs around $11.95
Ingredients
650g boned chicken thighs
2 cloves garlic, peeled and finely chopped
2 onions finely chopped
300g sour cream
2 tsp thyme
3 tbs tomato paste
1 tbs worcestershire sauce
1 supermarket brand 400g can sliced champignon mushrooms(drained)
2 tbs oil
2-3tbs chopped parsley
salt and pepper
3 cups rice
Directions
1.cook rice as per the instructions on packet.
2.heat oil in a large fry pan.
3.fry garlic and onions until lightly browned.
4.add thyme, salt and pepper.
5.slice or cube chicken into pieces.
6.add to garlic and onions and fry until the chicken is cooked
7.add drained mushrooms and worcestershire sauce, stir well.
8.add sour cream,tomato paste then mix well.
Serve with the rice and sprinkle with parsley
Do you have any saving tips that are not food related?
Yes, I buy 99% of my clothes from Lifeline shops. I don't follow fashion trends and only buy what I like, so second-hand shopping gives you plenty of variation. The selection is really good and you can buy top quality items for $5 -$10.
Give us a background on your charity the Tool Power Project?
The Tool Power Project is a charity I started after working for various Aid agencies over the last 7 years. A lot of Aid money is wasted as it never reaches the people it should, so we wanted to do something that helped the grass roots people.
What we do is recycle items found at our local dump shops and ship them over to Fiji and PNG. Items like sewing machines, grass cutters, saws, hammers, shovels, spades, wheelbarrows etc. We also buy new items like hair cutting sets and other items that can be used. Sometimes we are given items from friends or strangers.
Once they arrive in Fiji they get distributed to our Tool Power community run hire centres. So far we have 5 centres running.
The hire centres help people access tools which they would never be able to afford. Most items cost a $1 day to hire so it makes it affordable for everyone. Most people would not even own a simple tool like a hammer!
Communities keep approaching us to start a hire centre up in their settlement or village so we are constantly looking for items and adding tools to existing centres. Each community hire centre has different needs; for example they may not have power so it is no use giving them an electric sewing machine!
When a community wants to join, all we ask is that they first start up a micro finance
Thanks Catherine, keep up the good work. You must be a very busy lady.
Funny Moments with Money
This is an old ducktails cartoon. It’s 4:30 and meant for kids, but it explains inflation in a very basic way. It’s pretty good.
I hope you enjoyed this issue. Thanks for all your emails.
Adam Goulding (Also known as Mr Home Budget)
OCTOBER 2009 “100% of the shots you don’t take don’t go in” Wayne Gretzky USA Hockey Player