Sunday 9 July 2023

Can (almost) anyone get rich?

Can anyone (at least those living in a developed country, and of average intelligence and reasonable health) get rich during their lifetime? And without doing anything exceptional/unique, or getting 'lucky'? I think the answer is yes. Although it does take a reasonable amount of effort and discipline.

As a thought experiment, consider an 18 year old who starts saving $5 each and every week, and invests in a basic 'growth' index fund. S/he might have to start off saving up cash (or putting it in a no fee online savings account) and then starting to invest via a no/low cost investment app like Superhero (no inactive account fee and $100 minimum initial investment and $0 brokerage for Australian ETF purchases, such as VDHG) or Vanguard Personal Investor ($500 minimum investment, or $200 if done via an automated savings plan).

Such an investment might earn an average return of 9.45% (the actual average total return for the last 10 year period = although past performance is not a *reliable* indicator of future performance) which, after adjusting for inflation (lets assume it averaged 2.25%, although it is quite hard to predict the future) and a 32.5% marginal tax rate (although it is hard to predict future changes in income tax legislation or tax rates) for the average Australian average salary of $90,800, would produce an average real after-tax return of 4.2%.

This would mean the $5 weekly saving/investment could grow to $38,400 (in today's dollars) by age 65. Not rich, but not bad for a modest $5 per week.

If this person actually put in a bit of effort they could probably manage to save $500 per week without too much difficulty. Sure, they might not be able to buy the latest model iPhone, eat out every day (eg. might have to 'brown bag' their lunch), or buy a new car every few years using a car loan, but $500 per week would be in the realm of possibility for many people. If they wanted to.

So, at $500 per week, this hypothetical 18 year old would end up with $3.85 million by age 65.

Sort of similar to my situation.

I started out attending public (state) high school in 1972. I did some casual work at a market garden on weekends in senior high school, earning 60c per hour (the equivalent of $5.50 per hour in today's money, adjusted for inflation from 1974 to 2022 - see and then changed to better paid work as a night fill packer at the local supermarket for minimum wage while in year 11 at high school. My major financial achievement in high school was to end up with $100 in my St George Credit Union savings passbook by the time I started university ($532 in today's money). I then spent a few summer vacations working in the 'lacquer room' (wonderful acetone headaches!) of a pencil factory while at university, before getting a job as a new university graduate in 1984 for $25K pa ($90K in today's money).

Unfortunately I spent most of the $10K I'd saved up by the time I graduated from university ($30K in today's money) on a 10" Meade telescope (which I still own) and a Pentax MX SLR camera and some lenses (which I still have, but later upgraded to a Nikon DX digital SLR) - I should have spent the $10K on Microsoft shares when they floated in 1986 for US$28 (although it was very difficult and expensive to trade US shares in Australia back in the 1980s!). A $1,000 investment in Microsoft shares made in 1986 would be worth $3.23 million today. At the time I thought the Microsoft IPO was overpriced! D'Oh!

I've always saved around 25% of my salary (sometimes a bit more, sometimes a bit less), and never earned much more than the average Australian wage (my peak salary was probably about ten years ago - I've had salary increases below CPI and well below AWOTE increases for the past decade or more). And should end up with around $4.5 million by age 65. Pretty much where you would expect to end up by saving around $500 per week...

Now, $4 million or so probably isn't really "rich", but it's good enough for me. And most 18 year olds would probably be quite happy with the idea of ending up with $4 million if only someone could tell them how... Although they would probably dream of getting this amount and retiring by age 30.

But the reality is most Australians will actually end up with a lot less. The average net worth of Australians at age 65 is only about $1 million ($350K in super, a house worth $575K (on average), and about $50K in household items).

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1 comment:

Slack Investor said...

Hey EnoughWealth ... I really enjoyed this post. It really drives home what is possible with a bit of savings discipline and investment knowledge. I liked your "real life" examples of decisions you made ... you don't have to get everything right! Stay well... I look forward to your blogs. Cheers - Slack Investor