An advantage Gen Y has on older generations is time to amass money. Nicole Pedersen-McKinnon explains.
I give a lot of talks about money … especially to young people starting out in independent financial life. And you know what? They’re often daunted and sometimes disillusioned.
“I’m never going to be able to save money. Everything is so expensive. How am I ever going to get financially secure,” they lament.
What I say in response floors them: You have an asset that is so powerful it makes older generations jealous … because they may well have unwittingly squandered it.
That asset is time. And harnessed smartly, it is an easy way to build wealth.
Here’s a quick example to put a rocket under you.
A 20-year-old starts stashing $190 a month – or slightly more than $6 a day – at an 8 per cent investment return. They’ll be a millionaire at 65. And they’ll barely have missed the money.
But wait just 10 years, until age 30, and to retire a millionaire you’d have to find $436 a month. By age 40 it leaps to a much more painful $1052 (and at 50, it’s an eye-watering $2890).
The really beautiful thing about all this is that for our clued-up 20-year-old, $900,000 of their $1 million has been investment returns – in other words, it’s money that cost you nothing but time.
If you’re smart, you could double your money
The reason time is such a potentially lucrative asset is a little mathematical phenomenon called compounding.
This is quite simply the process of earning interest on interest ... and the reason that the earlier you start, the more money you get.
It’s so powerful that a pretty learned guy, Albert Einstein, named it the eighth wonder of the world. He also went on to say: “He [or she] who understands compound interest, earns it. He or she who doesn’t understand it, pays it.”
Check out this chart of how your investment returns absolutely take off when you start early.
To explain this, we’ll use your superannuation account as an example. Remember, super is a retirement savings scheme that requires your boss to pay an extra 9.5 per cent of your salary into a super fund of your choice.
So let’s say you have $10,000 in there to start off with. The graph shows what happens if you save $50 a week from the age of 20 or the age of 30 on top of the $10,000 existing balance. And that time difference is crucial.
You will more than double your money – to $1.14 million at age 65 – by starting just that 10 years earlier at 20 years old (based on the 7.23 per cent average super return).
Now glance at the 30-year-old. Starting at that age, that same $50 a week sees him or her amass only $536,936 … and you’ll notice the fund growth gets nowhere near the trajectory of a 20-year-old.
The less said about the poor 40-year-old (almost literally), who has only $242,666, the better.
So realise how much more you can make of your money and start being smart from 20 – just look how your wealth goes stratospheric. Thanks to compounding, the line’s almost vertical by the end.
You can forecast what you could personally achieve using MoneySmart’s compound interest calculator.
How to make sure the strategy works
Super is the hands-down easiest way to get money growing behind the scenes of your busy, expensive life.
First you get that compulsory 9.5 per cent saved for you every time you get paid! But secondly, it’s easy to arrange your own salary-sacrifice through your employer (or make a personal contribution and claim the same tax deduction). You won’t even lose the full amount of cash out of your pay packet as there is tax perks associated with super. In other words, it generally costs you less to put money into super compared to anywhere else.
And you know what? Ladies should pay particular attention. For some crazy reason many of us are often paid less, we’re still the more likely gender to potentially/eventually take career breaks to look after children, and then we usually go and live longer, so our super really suffers due to those factors.
Indeed experts at these things, the actuary firm Rice Warner, has even obtained special permission from the Human Rights Commission to pay their female staff 2 per cent more super than the male staff, to redress the disadvantage of the wage-based system. Similarly, ANZ now pays its female employees $500 extra super a year.
If from today you followed Rice Warner’s lead and also stashed an extra 2 per cent, it would be life-changing.