If your week has been like mine, it’s been a frustrating one. You arrive back at work full of enthusiasm after a well-earned break but find all the plans you made over the holidays have to be put on the back burner as you face the myriad of jobs that have been piling up in your absence. In a twinkling of an eye, the sickening realisation hits that January is already over and you’re stuck in the same old routine as last year.
Easy to procrastinate
This happens because it is human nature to attend to our commitments but to procrastinate over everything else. This is the reason people find it much easier to exercise with a friend or under the guidance of a personal trainer. Most of us will never get out of bed to exercise on our own, but will always keep an appointment to exercise with somebody else.
The secret of building wealth is to make financial commitments and then put a strategy in place to ensure they happen automatically. 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 knickknacks as part of the shopping expedition. Their loan repayments are deducted automatically from their bank account and by some strange but inevitable process, they arrive at next payday 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 this inbuilt computer in our brain continues to automatically adjust our spending so that our expenditure 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.
Make investing the first item of expenditure
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 those paying off their house, increasing the payments by just $400 a month could make a substantial difference. Imagine a couple paying off a $300,000 loan over 30 years at $1,800 a month. The extra $400 would chop 10 years off the loan and save them $142,000 in interest.
Borrowing for investment is the best way 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 or $10 a day) 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.
If you have only a small deposit and don't qualify for a margin loan or a home equity loan talk to an adviser about a regular gearing plan. This is where you invest a set sum each month into a share trust and a lender adds a borrowed amount to it. You decide how much you will borrow each month, but it must be no more than twice your own investment. For example if you decide to invest $500 a month, the bank would match it with up to $1,000 of loan money. Therefore you are investing $1,500 a month – of which $1,000 is borrowed. After 60 months you have invested $90,000 of which $30,000 is your own money and $60,000 is borrowed.
Alternatively, and usually cheaper and easier, you can direct debit into an internally geared share fund, which usually borrows about $1 for each $1 put in. The fund finances at wholesale rates, currently costing less than 4% compared with regular gearing plans at around 7.5%. In this case, there is no investor discretion on the amount borrowed.
And try to ignore short term market fluctuations and rely on longer term compounding and a rising market over time.
Simple? Yes, 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.
Noel Whittaker is Australia’s foremost financial adviser, a well-known media commentator and international best-selling author. He is currently Adjunct Professor with the Faculty of Business at the Queensland University of Technology.