Welcome to 2015. The year so far has been characterised by a litany of bad news. Terrorism is in the headlines, commodity prices are falling, and governments all over the world are having increasing trouble balancing their budgets.
Depressing as that may be, it’s still important to keep your own goals in mind and not let yourself be side-tracked by extraneous matters over which you have little control. For starters keep in mind that, despite the bad news, 2014 was another good year for investors. All the major asset classes generated positive returns and beat inflation and cash, just as they did in 2012 and 2013. That’s three winning years in a row.
As we move into 2015, I’d like to remind you of a fantastic strategy for building wealth. I discovered it about 30 years ago and at the time called it ‘the guaranteed secret of wealth’ – if you practise it I guarantee it will work for you.
It’s based on the concept that most people will pay their commitments and spend the rest. This is why nobody has any trouble paying their PAYG tax, or taxes levied through excise and sales, gambling and fuel taxes – they are taken automatically.
The secret of building wealth is to make financial commitments and then put a strategy in place to ensure that they happen automatically too. To do this, you have to change your habits so you start to spend your salary in the correct order.
Most people do it the wrong way. They get paid on Friday, fill the car up with petrol and then probably drop in to the bottle shop and the video shop on the way home. The next day, they do the grocery shopping and, if they’re doing this at a large shopping centre, may well fall into the trap of buying a few unnecessary goodies as part of the shopping expedition.
Their loan repayments or rent are deducted automatically from their bank account, and by some strange but inevitable process, they arrive at next pay day with nothing left over to invest. They resolve that next week will be different, but it never is.
This ability to spend exactly what one earns is one of the real mysteries of life. Petrol prices and interest rates can rise and fall, and groceries always go up, yet the computer in our brain will automatically adjust our spending so that our expenditure always runs in line with our income. This is the reason pay rises seldom make much difference to anybody’s financial situation.
Time and time again at seminars I have asked all those who have paid off a loan to put their hands up. The result is a sea of hands in the air. Then I say “keep your hand up if you invested without fail the payments you didn’t need to make any more.” All the hands sink and there are sheepish grins everywhere. Of course they meant to do it but simply never got around to it.
The solution is simple – make investing the first and most important item of your expenditure instead of something you try to do when you get around to it. For example, if you are on a low income, arrange to have a small sum such as $100 a month automatically debited to your bank account and invested in a good share trust.
For those paying off their house, just changing the payments from monthly to fortnightly could make a big difference. If you were paying off a $300,000 loan at 6% over 30 years at $1800 a month you would pay total interest of $347,000. However, just by changing the payments to $900 a fortnight, you would cut six years off the term and save $74,000 in interest.
Of course borrowing for investment is the best way of all, because a relatively small monthly payment puts a substantial amount of quality assets at work for you. A tax deductible $300 a month (that’s just $69 a week) would enable you to take out a loan to buy $50,000 worth of blue chip share trusts. If they achieve 10% per annum (income and growth combined) they would be worth $400,000 in 25 years. That would be a great boost for your retirement.
Simple? Of course it is, but most people never get around to starting. The good news is that once you put the process in place by direct debit you can virtually forget about it.