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 https://www.rba.gov.au/calculator/annualDecimal.html) 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).

Subscribe to Enough Wealth. Copyright 2006-2023

FY24 PAYG tax variation

Now that I know the current recurring expense and income for my investment apartment (and making the assumption that interest rate remains unchanged, rent remains unchanged and 100% occupancy, rates etc don't rise -- all of which are assumptions likely to underestimate actual loss, given that it seems likely that rates etc. will rise with inflation, occupancy can only be less than 100%, not more, and that interest rates are more likely to rise a little more during this FY), I was able to lodge my PAYG tax variation for the 2023-24 tax year. The figures submitted were:

gross rent:       $44,200

Interest:                  $56,610

rates/insurance:           $ 2,867

agent mngt fee:            $ 2,563

depreciation:              $19,153

land tax/strate levy:      $ 5,536

net loss:                  $42,529

Based on my marginal tax rate being 32.5%, this will reduce my annual taxable income by $42,529 and my tax liability by $13,822. So I should see an increase in my bi-monthly take-home pay of around $575. That will help meet the cashflow requirement for servicing my investment loan interest payments.

Hopefully by the time the interest only period on my loan ends in 5 years the rent will have increased more than the expenses (strata levy, insurance, land tax etc. Not by enough to cover the principle repayments, but by then I will be able to transfer my superannuation into 'pension phase' and the minimum annual pension payments should be more than sufficient to cover the loan repayments and possibly pay off some of the outstanding loan principle while I am still working full-time.

The reduction in tax rate from 15% to 0% on my SMSF balance when in pension phase should offset about 1/4 of the required pension payments, so won't affect my super balance at retirement too much. And will be offset by having increased equity in the investment apartment when I retire.

If I can pay off the investment property loan when I retire, the net rental income should be around $33K pa (in today's money). As my SMSF pension income stream not be taxable income, there should be very little (around $2,800) income tax due on my overall income stream during retirement (assuming current tax rules still apply).

Subscribe to Enough Wealth. Copyright 2006-2023

Investment Property FY2023

I've started working on the figures I'll need for completing my 2022-23 FY tax return. One of my new items for this year's return will be my investment apartment. The purchase was settled in late Feb and I was able to rent it out immediately. So for FY23 the relevant figures are:

Settlement date: 24 Feb.

Pro-rata days for FY2023: 127/365 (used for calculation of purchase costs that can be claimed over five years)

Items paid at settlement that are deductible this FY:

Council Rates:           $621.37

Water Rates:             $151.23

Land Tax:                $1,104.11

Strata Insurance:        $654.28

SUB-TOTAL:                              $2,530.99

Items paid at settlement that are deductible over 5 years:

Doc Processing fee:      $100,00

Property Search fee:     $47,40

SUB-TOTAL:               $147.40        

    pro-rate for FY23:                  $10.26

TOTAL                                   $2,541.25

Mortgage Interest paid:                 $17,133.82

Interest rec'd (on deposit etc)                                $1,754.61

Rent Received ($850/wk)                                        $12,750.00

Rent Expenses:                          

Letting fee:            $935.00

Insurance:              $411.00

Letting advertising:    $220.00

Managing Agent fee:     $701.25

Managing Agent Admin:   $44.00

NBN rebate to tenants:  $150.00

Strata Levy:            $2,118.20

Water rates:            $320.99

TOTAL                                   $4,900.44

Depreciation (DVM) FY23:                $9,276.55

TOTAL:                                  $33,852.06             $14,504.61

Net LOSS FY23:                          $19,347.45

Tax refund (@32.50% marginal rate):                            $6,287.92

Now that I know the current figures for insurance, strata levy, rates etc. I will be able to estimate my expected tax deduction for FY24 and submit a PAYG withholding tax variation form so I pay less tax out of each pay, rather than receive a large tax refund. This will help improve the monthly cash-flow situation. The variation takes about 4 weeks to process, so I should try to get it done this coming weekend.

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Net Worth JUN 2023

Chart updated to end of June in sidebar.

Stocks/cash increased $1.018.(0.56%) to $182,107

Retirement savings (SMSF etc) increased by $55,928 (3.72%) to $1,558,872

Est. of Home valuation (my half) decreased by -$5.183 (-0.51%) to $1,017,011. Again this month Sydney real estate index rose overall during May, so market weakness must still be specific to the Northern Beaches part of Sydney.

Other real estate (my 'lake house' and the investment apartment) increased by $2,302 (0.11%) to $2,062,234

The outstanding balance of the investment property mortgage remains at $1MM (the loan is 'interest only' for another 4 years 8 months). Interest rate is currently 6.29% after the most recent RBA overnight interest rate hike flowed through to bank home loan mortgage rates in full.

Other assets (my online depository bullion account and Perth Mint, and the bullion value of my gold and silver proof coin collection) decreased by -$1.560 (-4.42%) to $35,196. Silver and Platinum prices have seen a significant drop during the past month.

Overall, NW increased by $52,505 (1.38%) to $3,863,420 during June. This is a new 'all-time high' for my NW estimate, which seems a bit surreal given the war in Europe, high inflation, rising interest rates, economic woes in Germany, Sth Korea, China etc..

ps. I also have about $86K worth of accumulated unused annual and long service leave, which will be paid out upon retirement if not used, so I should theoretically include that somewhere in my estimated NW calculation. I only check my outstanding accumulated leave balances every couple of years, so it isn't something I want to recalculate monthly just to make my NW estimate slightly more precise.

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