RBA considered 40-bp cash rate raise
The Reserve Bank has revealed that it weighed up three different options for the size of the first cash rate rise in alm...
What I’m about to say may shock or conflict with many people’s habits, however, I’m only presenting one option (proven to be a very powerful option) for those with the right habits in place: saving money if, not allocated correctly, can cost you millions over your lifetime!
I’ll share a personal story. In the mid-2000s, fresh out of university, I had a friend secure a great job in a prestigious private school (‘all inclusive’) and she was saving exponentially every year.
Her thought process was to save for 15 years and in that time, she would have $750,000 in cash and in her words, ‘she would buy a home in Sydney for cash’ and be set for an early retirement. I did ponder this position at the time and initially it did seem to have merit.
However, my financial mindset quickly shifted to discussions with her explaining that even after five years, she would have the opportunity to utilise her cash as deposits for over $1 million in property at 20 per cent deposits plus closing costs.
By 2009-12, I was personally investing heavily within the Sydney market (which at the time was very flat) – the market fundamentals were excellent with low unemployment, high population growth, under supply of stock and sound cash flow.
I personally did very well out of those investments 10 years on, and the Sydney portion of my portfolio has remained cash flow-positive from the outset (even factoring in the 7 per cent interest rates at the time).
Fast forward to 15 years, I ponder how different the outcome would have been for that same friend if she had the correct financial literacy and had her barometer set correctly with a true understanding of the power of both leverage and cash flows.
With some quick calculations based on a $250,000 cash deposit which she had saved up over five years by 2010, this could have been leveraged into approximately $1 million in property (likely to be split between two to three separate assets) at a 20 per cent deposit plus closing costs (granted she had purchased correctly with a continued focus on balancing her personal cash flows).
Fast forward to a decade and that same $250,000 in cash would have created an asset base of $2 million market value and a pre-tax gain of close to $1 million.
If the investments were targeted correctly, she would have also remainder cash flow-positive and in that time also saved the $50,000 p.a. which she was doing, living in campus with all expenses paid. That would calculate to an additional $350,000 which would be offsetting her debt and would give additional cash flow.
In short, based on the calculations below, she could have expedited her pathway to owning her own home far sooner given the growth which has occurred in Sydney over the past 15 years and had a very handsome passive income position within 10 years.
The crux of the story is that Sydney is no longer the market for double digit gains and Melbourne is now entering this same cycle of modest gains, potential periods of sideways/negative growth.
However, that same friend will now need to work an additional 15 years of her life based on my calculations because she didn’t take action when she could have.
I have huge respect for the sacrifice and good habits which are required to stick to a strict savings regime, however, with the right amount of financial literacy and the correct team around her, life could be very different today.
There are most certainly still some outstanding opportunities throughout the Australian property market; the key is taking action and ensuring that you have the right people backing you and ensuring that you don’t become another ‘if only’ story.