Yahoo Finance How 'ordinary' Aussies can get rich without a 'massive windfall'
Getting rich quick is often sheer luck, but there's huge potential if you make a plan to get rich slowly.
Who doesn’t want to be rich or at the very least, financially well off. And the sooner the better!
When it comes to everyone’s financial position, we would all be delighted if we got a massive windfall monetary gain – a big lump sum of cash from a lottery win, or buying a stock or any other asset that all of a sudden jumps massively in value making us rich.This is the ‘get rich quick’ scenario that, frankly, cannot be planned.
It is usually sheer luck. It rarely works for ordinary people even though a huge proportion of the population buy lottery tickets, have a punt on the horses or buy a mining stock for a few cents hoping that it makes a discovery that will see its share price surge.
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For the tiny proportion of the population who does strike it rich, good on you!
For others, ‘investing’ money in the hope of getting rich quick is generally a money pit that actually works against achieving the objective of building wealth.
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For everyone else, the best strategy is to get rich slowly.
Or at least accumulating wealth over a reasonable period of time.
Get rich... slowly
This may sound boring but there are a number of strategies that people who are financially well-off today employ to accumulate wealth. With that financial security and in time, they have the financial wherewithal to do lots of nice things.
By the way, this is NOT financial advice and may not apply to everyone reading this article – research opportunities that fit your personal circumstances, especially those relating to your finances.
That said, the most basic issue in building wealth is spending less than you earn.
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While we all want to buy fancy things now, like travel, eating at snazzy restaurants and the like, if it is at all possible, a longer run strategy of saving money is the foundation of wealth accumulation.
A part of that strategy is then what to do with those savings?
Leaving it in a bank account to accumulate bank interest is safe, but the total return from interest on bank deposits are relatively low.
The investment proven to pay off: $2.54 million in 25 years
What has proven to be successful is to use the savings as a deposit to buy a house to live in.
The financial benefits of this are, frankly, huge.
This means that instead of paying rent to a landlord, your monthly repayments cover principal repayments and interest on the mortgage that allow you to live ‘rent free’.
You also own a house which in addition to shelter, it is an item, asset if you like, that on average goes up in value by around 5 or 6 per cent per annum over the long run.
What’s more, over time as your repayments make a dent in the balance of debt outstanding, your net financial position will improve to the day you make your final repayment and the house is yours, be that 25 or 30 years after your initial purchase.
This is ‘getting rich’ slowly.
Here is an example of how this could work.
Based on a dwelling that today costs $750,000 and assuming 5 per cent compounding house price growth per annum, after 15 years your dwelling will be worth $1.56 million; after 20 years it will be worth $1.99 million and after 25 years, it is $2.54 million.
After 25 years of careful budgeting, you should have paid it off.
No repayments, no rent.
Alternatively, based on the assumption that the value of dwelling rises on average 3.5 per cent per annum over the next 25 years, which is low, the value of the dwelling is $1.26 million after 15 years; $1.49 million after 20 years and $1.77 million after 25 years.
And by the way, if your household income is $125,000 per annum when you buy the house, based on 3.5 per cent income growth, which is very conservative, your income will grow to $202,000 in 15 years, $240,000 in 20 years and $285,000 in 25 years. On a more realistic 4 per cent per annum, your yearly household income will be $320,000 in 25 years.
These illustrative examples are the basic benchmarks for getting rich slowly.
How the 'average worker' can land $400,000 over 25 years
Add compulsory superannuation to this fantastic wealth accumulation and income growth, which is 11 per cent of each worker’s gross income.
On average household incomes, this will see a worker with zero super balance today have around $400,000 in 25 years.
It is relatively easy to see how a strategy of someone today on an average income buying an average-priced dwelling and having 11 per cent of their gross income paid into superannuation will be financially well off in 25 years.
Based on conservative figures, 25 years from now, you could be living in a house that you own that is worth around $2 million, with an annual household income close to $300,000 and around $400,000 in superannuation.
OK - this may not be rich but you’ll be doing well.
