The Engine Room Of An Investor & Aussie Households
Pop quiz: How do you know when you are rich?
The answer: when your income covers your costs.
It means you have more than you need.
A Look Inside The Engine Room Of My Portfolio
I think good budgeting is the key to financial freedom.
If investments are the wheels that get us moving towards our long-term financial goals, a budget is our engine.
My wife and I have a very simple budget.
I won’t bore you with the details right now, but the nuts and bolts of it is we do whatever we can to try and save 20% of our income.
Importantly, we aim to save 20% of our income before we pay for other stuff.
That is, we ‘pay ourselves‘ by putting money towards our long-term goals before we pay for things like cars, lunches, presents, rent, etc..
You: Why do you pay yourselves first?
I think a good budget puts the important things first.
We prioritise our investing because we know that’s how we’ll get ahead, and we can see the rewards of our hard work straightaway.
We don’t budget to save, we budget to invest.
That’s a very important psychological difference.
Note: If you can’t save 20% of your salary right away, that’s perfectly ok — you’re not the only one. We can’t always save 20%.
In any case, it helps to write down your expenses and income on a sheet of paper. Then look to see where you can cut some fat (expenses).
If you can start by saving just 1% this month, 2% next month, 3% the month after and so on. Keep track of your goals with an app, a jar or a sheet of paper.
If you take home $60k a year, 20% is $1,000 a month.
The Powerful Effect Of A Good Budget
Here’s a snapshot of the difference between an Aussie household investing 5% of their income (yellow line) and the “alternative” of investing 10% of their income (black line).
Source: Raskfinance.com; assumptions: 10%p.a. compound return, household income: $1,543 per week, the effect of taxes and inflation are excluded.
If an ‘average’ Aussie household, which makes $1,543 per week according to ABS data, can save and invest 5% of its income it will turn into a cool $659,917 after 30 years, compounded/invested at 10% per year.
That’s just 5% of $1,543 — or around $77.
Pretty good, right?
But if the same household can save and invest 10% the final amount becomes $1,319,834.
As a priest mightn’t say, “Jesus! That’s one helluva difference!”
Obviously, if you can invest more than 10% (e.g. 20%)the result is even better!
In case you’re wondering, these results come from the compound interest calculator which the team and I developed for Rask Finance. It excludes taxes and inflation (which are real things). But it also excludes any savings in Super or other things you do with your money.
Try the free calculator for yourself by clicking here. The link includes our video explaining the wonder that is compound interest.
Is A 10% Return Achievable?
Of course, a 10% average return over 30 years isn’t easy to find.
According to Vanguard data, even Aussie shares and property failed to achieve an average return over 10% per year between January 1988 and January 2018.
However, the average return on shares and property weren’t too far behind 10%. And remember, that’s the average.
So if an investor achieved even slightly better-than-average returns over the past 30 years and saved additional amounts of money inside Superannuation they might have a very healthy nest egg.
Two Ingredients For A Recipe To Success
In my mind, two of the key ingredients to generating a serious amount of money are time and consistency. Your household budget should help you make the most of these two things.
I think time should be measured in years and allow us to compound our money — that is, earning interest on interest. Make no mistake, over many years the power of compounding can be amazing.
You: “Where’s your proof!?”
As I wrote here, Warren Buffett — now worth more than $US75 billion — made 99% of his wealth after 50 years of age despite being a millionaire in his 20’s.
He is a great investor. There’s no doubting that.
But it is time and consistent returns which made Buffett into the multi-billionaire we read about today.
Consistency is about avoiding risky debt, sticking to a budget that is not easily broken (read: sustainable), and regularly adding money to our investments. It’s also about standing by a simple and proven investment strategy in good times and in bad.
That’s something I think we all can work towards.
There’s a great saying: you can save your way out of an investing mistake but you can’t invest your way out of a savings mistake.
Meaning, your budget should be the first priority.
A Special Announcement
In coming weeks, the team and I here at The Rask Group will be announcing something BIG.
It’s something I’ve been working on for many months and something I’ve wanted to do for many, many years.
It’s an enormous step for me and our company, and I look forward to sharing it with you.
Please keep an eye on your inbox (and promotions/spam folders) over the next few weeks for the announcements.
Until then, if you hear or read anything interesting I want to hear about it.
Cheers to our financial future!
Founder, The Rask Group
P.S. Buffett’s Berkshire Hathaway holds its annual shareholder meeting this weekend. The Yahoo!Finance website has a free live stream.
P.P.S. Rule of thumb: never trust a finance person who says “trust me” or “I got this”.
P.P.P.S. Trust me, my next update will be better than this one. I got this.