If you understand one fundamental “law of life”, making improvements to your lot becomes so much simpler.
That law is this: “No long-term good ever comes without sacrifice”.
Ever lost weight without cutting back on intake and/or pounding the pavement? Ever got an “A” without studying? Did you buy your first home without spending a few Saturday nights in?
So why do we think creating wealth is any different? It’s not. Continuing on as you are will lead to more of the same. A financial diet high in crappy consumer purchases and the sugar-like highs of immediate gratification can only lead to one thing.
Enjoying more of your life now, sure, but a diet of baked beans on toast on the government age pension in later life.
So, we are agreed, then, that to avoid baked beans in retirement, some level of self-denial now is required?
Yes? So, what’s next?
Determining how much it is that you’re prepared to give up. Or cut back on. Or do without in order to make life better for “Future You”.
Is it 10 per cent of your salary? More? Is it a fixed-dollar figure, say $10,000 a year that you’re prepared to commit to? The older you are and the less of this you have done to this point, the higher these figure need to be, as you don’t have as long to retirement to make up for it.
In some ways, it doesn’t matter what the number or percentage is. It’s far more important that you get started. Once you start to see some benefits, you’ll be probably want to commit more anyway.
Then it comes down to deciding how best you are going to do that. What level of risk are you prepared to take, to get that money working for you?
At the nice and safe – virtually no risk – end is putting that extra $10,000 against your mortgage. If you’re five years into a 30-year mortgage at 5.5 per cent, an extra $200 a week ($10,400 a year) will cut a $400k mortgage by nearly 11 years and will save you $148,000.
You then have $723 a week freed up by the end of the mortgage to put towards the next investment program.
If you don’t know the joys of a mortgage … that’s okay. You’re either sacrificing by saving now, or you’re an avowed renter. The latter needs to commit what they’re saving by renting to something below.
You’re starting investment could be superannuation, via salary sacrifice (which even has the S-word in the program title!)
For most earning $37,000 or more, super salary sacrifice leads to significant immediate tax savings, but then locks that money up in super until at least age 60.
You could start with a small lump sum into a share-based investment (say an index fund). More importantly than the initial amount is adding to it regularly, preferably monthly.
One of the problems with the above is that you need strong willpower. It’s too easy, sadly, to cancel the ongoing commitment when things get tough. You can stop paying the extra $200 a week in, or can cancel the ongoing nature of your investment. (That flexibility can also be seen as an upside.)
It’s one of the reasons I’m a fan of investment property, for the right people. You can’t just cancel your ongoing commitment (mortgage) for a while. You can’t sell it on a whim of panic.
You’re in for the long haul. You should never go into property thinking it’s any less than a 10 year investment, but preferably a forever investment.
You’ve got to meet those mortgage repayments. If it’s a negatively geared property, you’re having to contribute from your savings each month. Until, usually many years later, rents rise and the property becomes positively geared.
But property doesn’t suit everyone. It’s a huge investment – it doesn’t come in bite-sized chunks. It’s usually a minimum of $400,000 or so (for property worth purchasing). You need your regular income stream to be a little more secure.
Short of winning the lotto, or inheriting a pile of cash – and best of luck to you if that is your strategy – the only way to get ahead with your finances is through sacrifice.
So, are you going to start it today? Or find an excuse to kick that can down thre road a little?
Bruce Brammall is the principal adviser and mortgage broker with Bruce Brammall Financial (www.brucebrammall.com.au). His new book, Mortgages Made Easy, is available from the website now. E: firstname.lastname@example.org.