We all know that investment is important. We know that compound interest can help build wealth. And we know that procrastination is not helpful.
But there is a difference between knowing something and actually doing it.
To me, real financial success means replacing your (current or ideal) salary with investment income.
How to replace your income with investments
In Australia, the average salary is $92,029 in May 2022. The rule of thumb to calculate how much you would need in investments to replace that salary is to multiply that amount by 20 (or divide by 5%) to get there. $1,840,592.
The five per cent is based on the 30-year Australian share market return of 9.8 per cent, assuming an allowance for fees and taxes of 2.3 per cent and then allowing an allowance for inflation long term of 2.5 percent, leaving you with a total return of 5 percent that you can spend as income.
It gets a little technical (and it’s worth noting that this is an approximation), but basically because we allow for taxes and fees, as well as inflation, it means that if you had an investment portfolio of $1,840,592 today it would give you . an income of around $92,029 in the next 12 months. That income would then be indexed to inflation, so you would receive the same income in real dollars every year forever without eating into your original capital.
If you start with $0 in your investment account today, at age 20 if you were to save and invest $10.10 daily, reinvest all of the income (dividends from your stocks) over time when you reach age 60 , you would have accumulated. total investments of $1,840,592.
If you start investing at age 30, you would have to increase your daily investment to $27.72 to reach the same point. If you wait until age 40, your daily investment should increase to $81.11. And if you wait until age 50, you’ll need to make a daily investment of $296.38 to reach the same ultimate goal of $1,840,592.
This shows the power of getting time, but it also shows the power of getting started.
See here’s the thing. Most people think about investing, they know they should invest, but when the time comes they stop. It’s easy to put it off for a tomorrow that never seems to happen.
If you fall into the trap of inaction, you’re missing out on an opportunity to seriously start building your financial momentum. And ultimately, you’ll just be forced to play catch-up later, saving and sacrificing more to get the same result.
Steps to get your investment:
Understand composition
The power of time and money is a magical thing. You don’t need much to get started, and the power of consistent combination over time creates serious results.
A lot of people talk about composition, and I think most people understand that it’s “a thing,” but knowing it and seeing it are two very different things. You can use a simple compounding calculator like ASIC’s Moneysmart version to see what compounding can really offer you.
Fire up the calculator and use the Australian share market’s 30-year return of 9.8 per cent, then see how your investments could grow over time if you contributed different rates each week. I guarantee you will be amazed at the power of compounding and it will increase your motivation to invest more.
Set goals
Once you know what is realistically possible from your investments, it’s time to set clear goals. Knowing what you’re aiming for and setting your expectations for when it will happen should give you a lot of confidence in what you’re doing with your money. It will also give you more motivation to follow through on your plans to get the results you want.
If you are new to goals or early on in your financial journey, I suggest that your first couple of goals be small and not too far away; this will mean you have some milestones to celebrate the progress you’ve made.
Establish your investment strategy
Once you know what you want to invest and what you’re working on, you need to figure out what you’re actually going to invest in. The main choice here is whether you want to invest actively or passively, and the right choice will have a big impact on your results over time.
Statistics show that passive index investments perform better 95% of the time, so this can be a good starting point that you should have the confidence to start with.
Also keep in mind that the strategy you choose today isn’t necessarily the one you’ll have to stick with forever, so getting started will be more powerful than getting it perfect.
Once you start investing, you’ll start to learn more and can use that knowledge to refine your approach over time.
Choose your platform
There are many options as to where you should actually invest your money, such as ETFs through an online broker, micro investing, stocks or managed funds.
Although each of these different types of investments and platforms have differences between them, the actual impact is quite small. Costs are broadly similar between the options. Access to investments is quite similar. And the tax consequences are quite similar.
This may be a little controversial to my personal finance friends, but what it really means to you is that it really doesn’t make that much of a difference whether you choose to use an ETF, a managed fund, or a micro-investing platform, especially in the early stages. days of your wealth.
So if there isn’t a significant difference between the options, instead of spending a ton of time and focus on figuring out which platform is the best for your investment returns, you can focus on which type of investment is aligned with your investment strategy. giving you access to the style of investments you want and an account that’s easy to open, use and automate your regular investments.
In my opinion, if you are new to investing, micro investing is probably the easiest place to start. These platforms have a slick user experience and you can set up an account on your smartphone and start investing right away.
If you get stuck at this stage, seek good professional advice to help you get started; this will pay for itself many times over.
To start
Once you’ve followed the steps above, it’s time to turn your ideas into results and start investing. If you are nervous, you can start small, but the key is to start.
Investing is a skill, a behavior, a habit, and a muscle that is built over time. The sooner you start, the sooner you start flexing your muscle and building your knowledge and confidence around investing.
The wrap
Investing is the key to not being forced to work forever, and is a crucial part of financial success. The combination can create powerful results and outcomes.
But the combination works for you or against you. The longer it takes you to get started and start harnessing the power of composition, the further behind you can fall. But on the flip side, make the combination work for you and you immediately start building momentum that you can leverage to facilitate your next steps.
Ben Nash is an expert financial commentator, podcaster, financial advisor and founder of Pivot Wealth, the host of the podcast How to Be Successful with Money and the author of the Amazon best-selling book “Get Unstuck”
Ben has just launched a series of free online financial education events to help you get on top of your finances. You can check all the details and book your place here.
Disclaimer: The information contained in this article is general in nature and does not take into account your personal goals, financial situation or needs. You should therefore consider whether the information is appropriate to your circumstances before acting on it and, where appropriate, seek professional advice from a financial professional.