Episode 8
Why work your whole life, just to have nothing left over?
Pay yourself first!
- Keep your own money – why work for others, then have nothing left to show for it?
- You earn more over your lifetime with this strategy – you save more and get rich right? Regular income earners can be wealthy
Where does money go?
- Hedonic Treadmill (or, hedonic adaptation) – The tendency of humans to return to a relatively stable level of happiness despite major positive or negative events or life changes.
- Money/goals – despite a change in fortune or the achievement of major goals.
- As a person makes more money, expectations and desires rise in tandem, which results in no permanent gain in happiness. To feel happier, we then need to spend more.
- MC Hammer – paid his entourage first…didn’t work so well.
Hold up, we already do this in the form of super.
- Government legislates that your employer must contribute 9.50% of your salary into your super account on your behalf.
- But, is it enough?
- $1M in super at the end of your working life (in 30 years, for example)
- Drawing 5% = $50,000 income
- $50,000 in 30 years’ time though, is only $23,900 in today’s dollars
- Can’t access funds until you’ve reached preservation age (60)…or later, if legislation continues to change at the same rate…
What can you do instead?
- Monthly savings = lame
- Monthly investing = better
What to do?
- Don’t trust yourself? Super – lock away until 65. Technically better return for same investment, depending on fees. But lower tax.
- Salary sacrifice can save tax. And tax saved can offset costs.
- Trust yourself/need earlier access – Invest it outside of superannuation (personally)
- Pay yourself before you pay others
- Set a limit and invest the surplus. If the surplus increases, say, along with a pay rise, then invest the greater amount rather than increase your discretionary spending
Where to invest this?
- Property will be a different strategy (we look at that later).
- Doesn’t work when paying yourself monthly. Hard to save a deposit month to month
- When doing monthly investing look for the following:
- Liquid – easy to buy
- Divisible – units easy to purchase at small numbers
- Low transaction costs
- Diversified
Really when putting these together: The options
- Managed funds
- Exchange traded funds (ETFs)
- Listed investment companies (LICs)
- Why these?
- Divisible
- Easy to purchase
- Low transaction costs (depending on structure)
- Diversified
Discuss these three options in more depth in the next episode (part 2), but for now we’ll just focus on the strategy overall.
What works and what doesn’t?
- Some things work better in the long term
- It seems counterintuitive, but volatility is actually your friend when making monthly contributions.
Example No. 1:
- Investing $100,000 today, allowing it to grow for 25 years.
- Australian Shares (ASX 300) vs a typical portfolio with a growth profile
| Growth | AS | IS | AFI | IFI | Cash | AP | IP |
| Weights | 35% | 30% | 10% | 10% | 5% | 5% | 5% |
| Investment | Growth | Australian shares |
| Total value | $1,005,291 | $998,663 |
| Annual ROI | 10.13% | 10.40% |
| Average volatility | 9.16% | 11.49% |
Example No. 2:
Dollar Cost Averaging (DCA)
Investing a fixed dollar amount at a regular interval, regardless of share price, resulting in the purchase of more shares when prices they’re at a lower price and fewer shares when their prices are high
- Investing $100,000 today, allowing it to grow for 25 years.
- Adding $1,000 per month for 25 years
| Growth | Australian Shares | |
| Original Investment | $100,000 | $100,000 |
| Total funds invested | $400,000 | $400,000 |
| Total value | $2,089,636 | $2,124,140 |
| Annual ROI | 10.13% | 10.40% |
| Average volatility | 9.16% | 11.49% |
More volatility can be your friend!
- Over time – DCA!
- Reduces risks
- Reinvest income
- If you will be investing monthly forever, who cares if the market corrects tomorrow? – Buy cheap!
- Disclaimer: This is general information only and based on historical returns.
In Summary
- Pay yourself first, you’re worth it!
- Why work your whole life to not have anything left over?
- Invest the difference between what your set limits are and your income. Get off the hedonic treadmill!
In next week’s episode we’ll run through managed funds, exchange traded funds and listed investment companies and have a debate about which works best and in which situations.
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