posted in: Building Wealth
Why the best time to invest is now
Don’t let your job income make you complacent – why you need to keep investing
Have you thought about whether the money you earn through your career alone will give you the life you want in retirement? What is the point of slaving away at a job or business, only to find that the financial returns aren’t there when you go to retire?.
Often people work extremely hard and may even be earning exceptional money, but they don’t put the time into investing for their future. What that means is their money isn’t really working for them.
It’s pretty common to get caught up in the demands of work and everyday life, and only prioritise investing when you’re nearing retirement. The problem with this is that it can often to be too late to make a meaningful impact on your retirement situation, as the horse has bolted!
A lot of people have an idea of how long they want to work for, but they haven’t developed a financial strategy for how they are going to replace their income in retirement.
Here’s why you should prioritise investing as early as possible.
Even a great income or business may not carry you through retirement
Even those that are earning great money can often find later in life that their retirement savings won’t be enough to maintain the lifestyle they’ve become accustomed to living. Superannuation will cover some of it, but unless you have contributed significantly more to superannuation beyond the guaranteed employer contributions, it’s unlikely you’ll have enough to replace the working income you’re used to.
Overall, the income you earn through employment is finite. You need to think about where your income will come from once you’re no longer working.
In the case of business owners who might be working to build a valuable asset they can one day sell or that will provide a future income stream, putting all your eggs in the business basket can be a dangerous strategy. What happens if the business fails or you’re unable to sell your business? What happens if the passive income you’d planned on dries up once you step aside from the business?
Investing outside of your business is a good way to spread the risk. It’s all about creating alternative revenue streams that are not reliant on the business’ success.
Keeping your money in a savings account is effectively losing you money
Typically in a high inflation environment, any money you have in cash won’t be growing at the same rate as inflation. That is effectively the same as losing money as your purchasing power gradually decreases over time.
The monthly Consumer Price Index (CPI) released in January 2023 rose to 7.3%, up from the 3.5% in December 2021. Comparatively, the the typical interest rate on a high yielding savings accounts is currently sitting at around 3-4%.
When it comes to growing your money, you should be aiming to exceed the inflation rate over the long term to ensure your wealth and purchasing power improve as the years roll on. This is usually only achievable through investing in shares, property or businesses.
The below graph shows the difference of holding $100,000 in cash versus investing $100,000 into a share portfolio.
The below is based on the following assumptions:
- Share portfolio return of 9.52% p.a (Vanguard High Growth Index Fund 10 year return to December 2022)
- 4% inflation (1% above the RBA’s target range)
- 3.25% interest rate on cash (the 10 year return on cash is actually 1.84%)
You can see from the graph that to keep pace with inflation you would need to return $324,000 or more over a 30 year period, which the cash fails to achieve. As shares are a growth asset that benefit from income and capital growth, they manage to outperform inflation significantly with an end number of $1,530,000.
Most worthwhile financial goals worthwhile won’t be possible without investing
Think about the things that are important to you when it comes to long-term financial goals. Overseas holidays? Early retirement? Putting your kids through private schooling? All of these things are costly and may not be affordable unless you start building wealth today.
When it comes to understanding your financial trajectory, it helps to take a helicopter view and map out your financial position over the next 10-20 years. That way you can be strategic and work backwards to achieve your key financial objectives. If the financial modelling suggests you’re going to fall short in the future, then the good news is that you have the time to make changes and impact the future result.
For most people modelling their financial future is beyond their day to day financial capabilities, so it pays to engage expert financial planners who have a modelling based approach to predicting future wealth and income. Regardless of what investment scenarios you consider, the earlier someone starts investing the better off the long term results.
There is never a perfect time to invest
You may be waiting for the perfect time to invest. However, the reality is that there is no perfect investment window. There will always be risks and reasons not to invest – share market falls, rising interest rates, wars, economic shocks, or inflation. If you wait, new and different risks will simply replace the risks of today.
The biggest risk you can actually take is to do nothing. Investing early means that you get a compounded growth on an asset base over a longer period of time, making it more likely that you will achieve your long-term financial goals.
The below chart shows the difference of investing $500 per month from age 25 versus $500 per month from age 35. You’ll notice that the person who started investing at 25 (and only contributed an extra $60,000 over the 30 years) is about $500,000 better off at age 65.
Don’t let the media headlines of today deter you from investing. The most important factor is time in the market, not timing the market.
If you wish to discuss the best way to go about building your investment portfolio then feel free to chat to the team at Montara Wealth today.