Pa­tience key to sav­ings

NT News - Real Estate - - Realestate Market Place - AN­THONY KEANE

TURN­ING $5 a day into $50,000 is not as daunt­ing as you might think.

All you need is pa­tience, and the power of two of the most pop­u­lar and proven laws of in­vest­ment.

Pa­tience is re­quired be­cause it’s go­ing to take more than a decade of daily de­posits to get there, and power is gained from em­brac­ing com­pound in­ter­est and au­to­matic in­vest­ing.

Five bucks won’t buy you much these days, but any­one who can dili­gently put that much away daily into an in­vest­ment plan will reap big re­wards later on.

The best start­ing point for num­ber crunch­ing is the Aus­tralian Se­cu­ri­ties and In­vest­ments Com­mis­sion’s mon­ com­pound in­ter­est cal­cu­la­tor, which shows in se­conds how much your de­posits can grow over time.

Com­pound in­ter­est is the process of earn­ing in­ter­est on your in­ter­est on your in­ter­est, and so on, so that over time the in­ter­est you re­ceive dwarfs the ini­tial in­vest­ment.

You can use ASIC’s cal­cu­la­tor to plug in your de­posit amount, fre­quency of de­posits, num­ber of years and in­ter­est rate — which your ex­pected rate of in­vest­ment re­turn — and it will toss up a dollar fig­ure that for many peo­ple is sur­pris­ingly large.

Five dollars in­vested ev­ery day reaches $50,000 in just over 14 years, ac­cord­ing to ASIC’s cal­cu­la­tor and based on an in­vest­ment re­turn of 8.5 per cent a year. That av­er­age an­nual re­turn is much higher than the 2-3 per cent peo­ple are get­ting from bank de­posits to­day, but be­low to­tal share­mar­ket re­turns and most su­per funds’ re­turns over the past five years.

If 14 years is too long to wait, bump­ing up your de­posits to $10 a day gets you to $50,000 in just over nine years.

The world’s most suc­cess­ful long-term in­vestor, bil­lion­aire War­ren Buf­fett, once said that the stock­mar­ket was a de­vice for trans­fer­ring wealth from the im­pa­tient to the pa­tient.

Pa­tience is vi­tal be­cause any in­vest­ment likely to re­turn 8.5 per cent an­nu­ally is go­ing to have ups and downs — some­times pretty steep ones.

When in­vest­ment mar­kets are ter­ri­ble, like they were dur­ing the depths of the Global Fi­nan­cial Cri­sis a decade ago, your pa­tience gets stretched even fur­ther and it can be dif­fi­cult not to crack.

The heav­i­est selling dur­ing the GFC was dur­ing early 2009 when many peo­ple sim­ply gave up. They sold out and their money was trans­ferred to brave — and for­tu­nate — buy­ers who have en­joyed stel­lar growth since.

Pa­tience pays off for peo­ple who make au­to­matic in­vest­ments.

De­posit­ing money at reg­u­lar in­ter­vals means you are buy­ing as­sets dur­ing the good times — when prices are soar­ing — but also the bad times when

The fu­ture al­ways seems fur­ther away than the past and can cre­ate a men­tal bar­rier to in­vest­ing.

How­ever, if you be­gan stash­ing away five bucks a day a decade ago, you’d be tens of thou­sands of dollars richer than you are now.

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