Paul’s ver­dict

Bal­ance out the fun spend­ing with wealth cre­ation

Money Magazine Australia - - CONTENTS -

Hi Emily. It is al­ways great to get ques­tions that make me laugh, so I re­ally en­joyed the “de­light of de­signer hand­bags” com­ment. They fit per­fectly into my “anti-wealth” cat­e­gory. Mind you, I own a yacht, so I can hardly com­ment! The trick, though, is to try to bal­ance out the anti-wealth spend­ing with build­ing your wealth.

Here I reckon you have done a good job. Buy­ing a house at 27 was a great move given the strong re­turns in most parts of Australia over the past seven years. And de­spite a few hand­bags along the way, the fact that you started top­ping up your su­per when you first started work shows you have done re­ally well with the bal­ance be­tween an­ti­wealth spend­ing and wealth build­ing.

There are few mir­a­cles when it comes to money, bar a very small list:

Spend less than you earn.

• In­vest for the long term in growth as­sets, such as prop­erty and shares.

• Elim­i­nate high-in­ter­est per­sonal debt.

• Legally min­imise tax us­ing su­per.

• Risk equals re­turn.

• Com­pound in­ter­est.

Let’s com­bine a few of th­ese. First, spend less than we earn, then top up su­per via salary sac­ri­fice. At your age, I would think you would go with a bal­anced or growth fund, mean­ing we bring two more items from my list into play: in­vest­ing in growth as­sets such as prop­erty and shares, then com­pound re­turns. Your su­per fund is highly tax ad­van­taged, as re­turns are taxed at a max­i­mum of 15%.

Let’s go with your salary of $68,000 and top up su­per by $50 a week. Any dol­lar you earn above $37,000 (up to $87,000) is taxed at 34.5%, in­clud­ing Medi­care, so you would take home 65.5¢. $1 salary sac­ri­ficed into su­per is taxed at 15%, so you would have 85¢ in­vested. This is re­ally im­por­tant. You would need to grow the 65.5¢ that you get after tax by over 30% to catch up to the 85¢ in su­per. Mean­while, the 85¢ in su­per is work­ing away for you, taxed at a max­i­mum of 15%.

With th­ese num­bers we can make a guessti­mate, based on his­tor­i­cal in­vest­ment re­turns, as to how much you would have at, say, age 65. We should also al­low for in­fla­tion. So let’s say your su­per will earn 4% a year, on av­er­age, above in­fla­tion. Our cal­cu­la­tion is then based on the $115,000 you cur­rently have, plus your em­ployer’s con­tri­bu­tions of some $6460 and then your $50 a week (or $2600 a year) topup. This to­tals $9060 a year, but after the 15% con­tri­bu­tion tax, that’s about $7700 a year go­ing into su­per. Pop this lot into a cal­cu­la­tor and we get $868,000. This is in to­day’s money so it gives you an idea of what spend­ing power you would have.

There is a whole bunch of stuff that can change this num­ber. Your salary may go up, so your em­ployer con­tri­bu­tions in­crease, in­vest­ment re­turns may be bet­ter than 4% above in­fla­tion, or worse! But it gives you a bit of an idea of the power of com­pound in­ter­est.

The only dis­ad­van­tage of su­per is that you can’t ac­cess it un­til you reach re­tire­ment age, so you may wish to stick with em­ployer su­per con­tri­bu­tions and use your own money to in­vest out­side su­per. A well-lo­cated in­vest­ment prop­erty or a share port­fo­lio can also work well.

So de­spite quite a few hand­bags, you are in a great fi­nan­cial po­si­tion at 34. The trick is to bal­ance out the fun spend­ing with wealth cre­ation and you are on track.

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