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Ever wanted to know how Aussie household wealth is doing?
Well, it seems like the gap between the have’s (them) and the have-not’s (us) is increasing.
That is to say, methinks dem rich are gettin’ richer.
But don’t just take my word for it – the latest Roy Morgan (amazing research guys) Wealth Report has shown that the biggest gains in the past decade have been among the wealthy top 10%.
What about us poor buggers in the bottom 50%?
Our share of private wealth fell from a measly 3.9% (yes, 3 point freaking 9) a decade ago to… 3.7%.
Just wow, those at the top really do control it all don’t they?
Here are some other key findings:
- The wealthiest 10% of Australians now have an average net wealth (assets minus debts) of over $2 million and hold 48.3% of net wealth compared to 46.8% in 2007.
- Women (you go girls!) have improved their average net wealth position relative to men, with males now holding an average of 10.6% more than women compared to 26.5% a decade ago.
- Growing personal wealth is highly correlated to income level, with those earning over $130k having an average net wealth ($1.2 million) nearly five times those earning under $15k ($248k).
- Housing wealth (51.9%), is down slightly from 52.4% in 2007, while superannuation assets is slightly up, rising from 19.6% to 21.8%.
Here’s a nice pretty graph courtesy of Roy Morgan to sum it up:
Strewth, that MS Paint job took longer than it should…
Anyway… so what can you and I do about it?
That is, how do we wiggle our way in to the top 10% and a two million plus net wealth?
Rob a bank? Gold dig into a wealthy partner? Invest in Lotto?
Yes yes, all viable and good, healthy options.
But no, the solution is right in front of us.
You see, the key difference between the rich and us – is their mindset.
And a key principle of their mindset is they understand compound returns.
That is returns which are… er… compounded.
Not just in terms of investing and money, but in life, in thinking, in learning – everything.
And given enough time, compounding can allow any one of us (with a steady eady job/income) to reach $2m.
Take shares as an example.
Did you know that $1 invested in Jan 1900 would be worth almost $300,000 (nearly 12% compounded) in 2018?
Here, take a look at this:
Hey presto! All you have to do is invest $7 into Australian shares back in 1900 and…
OK, maybe not.
But in the last 30 years, the story is similar:
$1 invested in Jan 1988 turns into $142,053.
That’s almost 11% compounded yearly.
So let’s take some raw numbers as an example:
Say you have $10,000 in year 1.
At a 10% compound return in the Oz stock market, this will turn into $67,275 in year 20.
Fair enough, nothing to sneeze at of course.
But then let’s say you ADD in an extra $10,000 every year -then it turns into almost $700,000.
If you take a 30 year time horizon – $10,000 invested turns into $174,494. And add in an extra $10,000? Well that’s over $1.9m thanks.
You can play with the numbers yourself here.
So how do you invest in shares in Australia? Simple! Direct shares, ETF’s, LIC’s, Funds, CFD’s and a whole bunch of other ways… in fact, subscribe to this blog as I’ll be posting more on these topics!
The Russell Investments Long Term Investing Report highlights compound returns also:
It shows that in the last 20 years, Australian real estate outperformed shares!
So how about using property then?
If we take a more conservative 7% per annum growth (as opposed to the 10%+ in the graph), and using the compound return calculator, we can see the effect being astronomical the longer the time horizon.
A $500,000 investment compounded over 30 years at 7% return p.a. equates to over $3.8m.
Mind you, net wealth is assets minus liabilities – hence any mortgages need to be factored into consideration here.
Yet the loan value against property either remain static (interest-only repayments), or reduce (principal + interest repayments). But the asset (property) value itself, should be steadily increasing.
More specifically, how you can achieve wealth is by leapfrogging into more investment properties.
I wrote an earlier post on this (read here) but traditionally what you do is…
“…For example: purchase property A for $200,000. Wait until values reached $250,000, refinance and access the $50,000 equity.
Use the $50,000 equity as deposit on property B to purchase for another $200,000.
Wait until property B reaches $250,000 (hopefully by then property A reaches $300,000, a further gain of $50,000).
Refinance and use the $50,000 equity from property B + additional $50,000 equity from property A as deposit on property C… and so on and so forth.”
Leapfrogging +capital gains =
“Borat voice on” GREAT SUCCESS “Borat voice off”
There ya go guys!
A couple of simple ways for those of us aspirants who want to crack into the top of the wealth pyramid.
Mind you, they always say “past performance is not an indicator of future performance” – but I like the saying that “history does not repeat but it does rhyme” better.
Sure we might be approaching a period of low growth – where 10-12% p.a. is no longer a benchmark but a target, but you know I’m a believer.
I’m a believer that we might not achieve 12% consistent growth, but what about 8%? What about 7%?
And if we all just have a bit of patience, stretch out the time horizon a wee bit and watch compound interest do its magic, I’m very confident we will get there.
After all, the Roy Morgan Report never really disclosed the age of the participants did it?
Times like this, I always remember a quote from a great man:
“You can’t produce a baby in one month by getting nine women pregnant”.
Sometimes, the very best things take time.
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Nice post! Great to see the power of compounding. I myself am part of the bottom 50%, time to get hustling.
The Frugal Samurai
Thanks Liz! Never too late to get on it 🙂