Some credit card cash-back

One of the oldest credit card 'rewards' schemes in Australia is FlyBuys. I've been a member since the program started, and it's always nice to redeem some of the accumulated points for a credit onto my credit card account. My latest FlyBuys. statement showed that some of the points balance had been accumulated three years ago, and would therefore expire at the end of February. So yesterday I used most of my points balance to claim a $450 credit onto my CC account. It was interesting that the reward confirmation screen advised that you should 'consult your tax advisor' to check if the value of the reward was taxable income. A quick check of the tax office website shows that such CC rewards are not taxable. That's not really surprising - if the value of the reward accumulated by using the CC was taxable, then the annual fee and interest charges would also be deductible expenses. The last thing the ATO wants is for consumers who 'earn' $100 worth of rewards points to be able to write-off hundreds of dollars of credit card interest!

I'll be earning fewer FlyBuys. points from now on - the points rate has been decreased from 2 points per dollar to only 1 point per dollar for spending on my National Visa CC, and I'm also using the CC for fewer bill payments since the RBA changed the rules and allowed service providers to "pass on" merchant CC fees. These days you have to check the fine print of any utility bill to confirm if there is a 1% or more fee for making payment via CC.

BankWest sent me a special offer for using my BankWest Zero CC during February, March and April. If I use that CC for at least $500 spending each month I'll be given a $30 credit. That works out to be 2% "cash-back" on that card, compared to the approximately 0.2% value of FlyBuys. points, so for the next three months I'll be using my BankWest CC for at least $500 of my usual bill payments and grocery shopping each month.

As I pay off my CC balances in full each month, none of these CC rewards schemes cost me anything (aside for a low annual account fee for a couple of my CC accounts).

Subscribe to Enough Wealth. Copyright 2006-2008

One last balance transfer offer

A couple of years ago I had fun opening new credit card accounts that offered 0% balance transfers for periods of 6 months or a year. Back then there were no fees for doing the balance transfer, and the funds could be invested in an online account earning 6%pa or more.

In the past year plunging interest rates and tightening credit markets saw fewer and fewer balance transfer offers appearing in my mail, and those that turned up were for "low" interest rates, short periods (4 months), or charged a fee for doing the balance transfer. Coupled with lower interest rates on savings accounts, it wasn't worthwhile doing balance transfer arbitrage any more.

But it looks like I may get one last chance to get some "free" money from my credit cards - Virgin Australia is getting out of the credit card business and their customers have been issued new "Ignite" credit cards by Westpac Bank (who were the card issuer for Virgin. The "ignite" card has no annual fee (same as the Virgin CC) and Westpac is offering 0% balance transfer (from any non-Westpac CC account) for 6 months. I'll apply for a $25,000 balance transfer "from" my existing NAB Visa CC account, which will put my NAB CC roughly $25,000 into credit. I can then withdraw the surplus credit via a "cash advance" for a $10 admin fee. Taking a cash advance on a CC is usually a very stupid move, as the interest rate on a cash advance is even higher than the usual CC interest rate. However, there is no interest charged if the "cash advance" is less than the amount the account is in credit.

I won't bother putting the funds into my online savings account however, as the interest rate on deposits has dropped below 4%pa. Instead I'll use the funds to pay off some of my variable interest rate margin loan balance, which is costing me around 8%pa. When the 6 months interest free period ends, I'll withdraw the funds back out of the margin loan account and repay the CC account. Overall, this should give me a benefit of around $1,000.

Subscribe to Enough Wealth. Copyright 2006-2008

I'm happy to save the planet - if the government (taxpayer) is paying for it

Our 315L electric water heater is pretty economical, as off-peak electricity only costs 5.2c per kWhr, but it still accounts for almost 1/3 of our total electricity consumption and a significant part of our quarterly electricity bill. Since the hot water tank is at least eight years old, which is close to the age at which they are prone to start leaking due to corrosion, I'm looking at replacing our existing system with a new "heat pump" system. A 315L domestic heat pump water heater is very expensive to purchase compared to a traditional electric water heater, costing around $3600, but the Federal government recently increased the rebate available for such systems from $1000 to $1600 and there is also a state government installation rebate and the value of the systems RECS rating which all together should reduce the purchase cost to around $300. Installation costs should be similar to that for a conventional system, so due to the government rebates the heat pump should pay for itself through reduced electricity bills in just two or three years.

I'll double check my figures and the fine print relating to the state and federal government rebates before placing an order, but it appears that the ROI on buying a heat pump is very attractive - but only due to the government rebates available. It's very nice that I can help save the planet (supposedly) by reducing our greenhouse emissions AND save money by doing so, but I'm not sure that this rebate program is the most effective use of taxpayer funds to reduce CO2 emissions.

The other government rebate available is $8,000 towards a $13,000 roof-top solar polar grid-feed system. I'm not sure that our house is suitable for such a system, due to the large tree in our front yard casting significant shadow on part of the roof. Also, even with the rebate such a purchase doesn't make a whole lot of financial sense - it would only generate enough power to satisfy around 1/4 of our electricity use (1/3 if I go ahead and install a heat pump water heater). The annual saving on our electricity bill would therefore be around $250pa after paying out $4000 for the system. A 6.25% ROI wouldn't be too bad, but after deducting depreciation of around 4%pa (the system has a 25-year expected working life) it really isn't a very appealing investment. In addition, I suspect that the storage batteries used by the system won't last anything like 25 years before requiring expensive replacement. This is another government rebate that I suspect is rather wasteful. Photovoltaic technology is advancing rapidly, so I expect the cost of solar power generation systems such as this will plummet in coming years. If that turns out to be the case, the money spent on subsidising household solar power systems now would fund many more such systems if deferred for a few years. In fact, within a decade such systems may be cost-effective even without any government subsidy.

Subscribe to Enough Wealth. Copyright 2006-2008

A tale of two stimulus packages

With Australia having just passed it's A$42 billion (US$26 billion) 'economic stimulus package' and the US$789 billion stimulus pack in the USA close to final approval, it's interesting to see how the two compare.

The first obvious difference is the size of the packages - the Australian effort is around 3.5% of Australia's GDP, while the US package is almost twice the size in terms of GDP, coming in at 5.7% of US GDP. On the one hand this is surprising given Australia was starting from a Federal budget in surplus while the US Federal deficit is already US$10.7 thousand billion (!). On the other hand, the Australian economy is in much better shape than the US (although we will suffer more from the impact of the global recession on our exports) and still has some fiscal stimulus available. Coupled with the problems the US is facing regarding future social security and medicare funding, I think the size of the US Federal deficit will be a drag on long-term growth (due to the need for higher taxes). Even if the US stimulus package is effective in boosting growth in 2009-10, it may just create worse problems down the track.

In some regards it seems that the global economic crisis was due to western consumers bringing forward too much consumption using personal debt, with low interest rates amplifying a feedback loop of inflated asset prices being used to obtain further borrowing at historically low interest rates. Once the private global credit limit had been reached and consumption dropped in order to repay debt and increase savings rates around the world, governments began trying to boost spending by increasing public debt. At some stage public debt will exceed the borrowing capacity of sovereign states (for example Iceland has already gone 'broke', and it seems as if Russia is also getting close to the point of defaulting on debt repayments), and when both private and public borrowing is constrained, the global economy is likely to suffer many years of minimal growth as debt is slowly unwound. It may not happen for quite a while though - the US dollar has remained relatively strong for the past couple of decades despite a huge and growing debt problem.

The second difference I think is very significant is the "quality" of the two packages. Despite considerable debate about how best to stimulate the economy (public spending vs. tax cuts for example), there appears to be a consensus that such a package should satisfy the "three T's" as much as possible - that it should be timely, targeted and temporary. The US package has been reported as delivering around 54% "3T", while only 12 to 20 cents in the dollar of the US package will be timely, temporary and targeted. The graphs below show when the spending is expected to feed into each economy:



It appears that around 75% of the Australian stimulus will be implemented by June 2010, whereas just over half of the US stimulus will be implemented before the end of 2010. Stimulus spending in 2011 is quite likely to fuel inflation and exacerbate the next boom-bust cycle, rather than fix the current crisis.

Overall, I'd give the Australian package a B+ (points off for political ideology and horse trading that has shaped the spending decisions) and the US package a C-, with quantity being substituted for quality in an effort to make the grade.

Subscribe to Enough Wealth. Copyright 2006-2008