To get the power of compounding working for you, at some stage you’re going to need to create a consistent cash surplus to invest.
In my opinion, there is no better wealth building tactic than spending less than you earn.
Most of us already do this, but we are not doing enough of it.
I’m talking about a saving rate of at least 20%. That is the bare minimum you should aim for. Those serious about their financial independence will aim to achieve a much higher rate.
After all, the more you save, the faster you can achieve financial freedom.
And just to note, I’m talking about saving 20%, in addition to the compulsory super on your wages. Just got harder right?!
Why 20%? I believe 20% is an achievable, happy medium, for the every day individual.
It’s enough to make most people stretch in order to achieve this goal, but achievable enough that it doesn’t suck all the happiness away from you.
Sure, you can save more, but we are talking about the average person here. There are always extremes.
Want to retire earlier? Just increase your savings rate while you reduce your expenses.
I believe in balance. I believe there are things that can only be done at this point in my life, that are worth more to me now, than an extra $100,000 in savings when I’m 75 years of age.
Besides, 20% is enough, and I’ve got the proof.
According to the Australian Bureau of Statistics, their May 2018 data collection records the full-time adult average weekly ordinary time earnings as $1,586.20 per week (before superannuation).
This provides an average wage of $82,482.40 plus superannuation of $7,835.82 per year.
20% of $82,482.40 requires you to save $16,496 a year. Looks like a lot when it’s written like that.
How about this - $317 per week.
It looks more achievable when it’s broken down to bite size goals.
Welcome to my first cash flow tip, save small amounts regularly.
How does this all add up to $1,000,000? Well we are going to invest the difference for the long term.
Let’s say you are 30 years of age, earning the average Australian income. You save $317 per week, and invest it at 8% per annum.
Here’s what the figures look like over 30 years:
Year | Capital Invested | Return on Investment | $317 per week | Value of Capital |
1 | $0 | $0 | $16,484 | $16,484 |
2 | $16,484 | $1,319 | $16,484 | $34,287 |
3 | $34,287 | $2,743 | $16,484 | $53,514 |
4 | $53,514 | $4,281 | $16,484 | $74,279 |
5 | $74,279 | $5,942 | $16,484 | $96,705 |
10 | $205,845 | $16,468 | $16,484 | $238,796 |
15 | $399,159 | $31,933 | $16,484 | $447,575 |
20 | $683,200 | $54,656 | $16,484 | $754,340 |
25 | $1,100,550 | $88,044 | $16,484 | $1,205,078 |
30 | $1,713,774 | $137,102 | $16,484 | $1,867,360 |
Wow! Those figures look unbelievable don’t they!
So just by saving $317 a week for 30 years, you could retire a multi-millionaire!? Yup.
I can hear the kicking and screaming again. There’s issues with the ABS figures!
Not everyone works full time!
Not everyone is average and you’re an elitist high income earner!!
Ouch, that last one really hurt.
I’m just going to preempt and refute the other claims right now:
Shares don’t return 8% per annum: Not every year, but the historical average is 8% per annum.
Your math is too simplistic: I have calculated the 8% return on investment on the last day of the year, with no allowance for returns in the first year or during the year (most companies may dividends twice a year). This is conservative because when you invest normally, such as through dollar cost averaging or in your superfund, you are investing regularly throughout the year, therefore having more capital deployed earlier than in my calculations. I’m a conservative kind of person.
You haven’t taken into account tax considerations: That’s a good one. But tax can be reduced through the use of correct tax structures and I am assuming mostly fully franked dividends. If you invest in your superfund instead of your own name, these estimates are realistically understated as your superfund would be receiving franking credits at 30% but only be paying tax at 15%.
I’m not 30 years old: I can’t change time, so you either have to invest more or settle for less. But notice how the investor in this case is worth more than $1,000,000. Even if you start later in life, you’re not going to be sad about being richer in the future.
If you still think it’s not possible, here is my logic for why you’re wrong.
I haven’t even included your spouse’s income.
Do the math for yourself and add in your spouse’s income. He or she may not be earning the average Australian wage, but if they too start saving 20% of their income too, you’re going to be a millionaire a hell of a lot sooner.
Even if you were both earning 50% less than the average Australian full time wage, together, you could both save $160 a week and retire as multi-millionaires at the age of 60.
I’m assuming if you’re reading a finance blog you’re a reasonably motivated person.
My calculations above haven’t factored in future wage increases.
There’s going to be some sacrifice along the way, but the reward is your financial independence.
So stop looking for excuses.
It can be done, and is being done, by average individuals all around the world.
Would you prefer to keep disagreeing, or get on with building your wealth?
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