Three Small Steps To Building Wealth

Having big financial goals can be intimidating, here’s three small steps to help you achieve them and build long-term wealth.

A popular proverb says that the best time to plant a tree was 20 years ago: the second-best time to plant a tree is now. The same principle applies to building wealth.

Big goals can feel daunting. How will you ever be able to save up for a deposit to build your first house? Will you ever be mortgage-free? What about retirement? The numbers are enough to make anyone’s head spin!

However, it’s important not to let those big goals paralyse you. Small steps can make all the difference in getting you to your destination.

Here are three examples that show the power of starting small.

1. Saving for a deposit

Thanks to the magic of compound interest, the earlier you start saving the better. A hundred dollars in the bank means that those dollars are earning interest right away. Given a 5% interest rate, that hundred dollars turns into $105 after one year, $110.25 after two, and so on.

And while savings rates have been low in recent years, they’re climbing again in response to increased inflation rates. Canstar currently lists term deposits returning a rate of up to 4.25%. (Aug 2022)

Another option, if you feel confident, is to invest your savings in shares. There are several lower-risk options, such as managed funds and so-called ‘blue chip’ investments, which may return lower amounts than high-risk or speculative investments, but still outperform savings accounts. In the 20 years prior to 2018, for example, Australian shares returned an average of 8.8% per year - easily beating out the annual inflation rate of 2.64% over the same period.

Whichever way you go, remember that the earlier you start, the better. Small deposits, made often, add up faster than waiting to deposit a large chunk down the track.

2. Paying down your mortgage faster

Once you’ve got that mortgage in place and you’re settled into your brand new house, you can relax, right? Well, sort of. You can definitely take a break from saving and reward yourself for the massive milestone you achieve.

Once the champagne is drunk and you’ve treated yourself to a fancy restaurant dinner, sit down and set the next goal. Your home loan is probably the biggest debt you’ve ever taken on by an order of magnitude. Does that mean you can’t try and pay it down faster? Not at all.

Paying extra on your mortgage can save you a huge amount of money. Banks calculate the interest on your loan daily: the less your loan amount, the less the interest.

Using the repayment calculator at Mortgage Domayne, you can see how much you can save with even modest overpayments. On a loan of $500,000 over 30 years, making an extra payment of just $250 per fortnight after the first year can save you a huge $102,926.53 and have you mortgage-free a full 8 years and 6 months early. Isn’t that worth a little sacrifice?

Even a smaller amount can make a big difference. Just $100 a fortnight - or a dinner out for you and your partner - will save you $51,513.50 and shave 4 years 2 months from your home loan!

3. Saving for retirement

Retirement probably seems like a long way away right now, but if you haven’t already started maxing out your super contributions, now is the perfect time. Why? Two very good reasons.

Firstly, making voluntary contributions to super has some significant tax advantages. Concessional super contributions (the super contributions you make yourself as part of a salary packaging or salary sacrifice arrangement) are taxed at 15%. For most people, that’s below their marginal tax rate. The money you ‘sacrifice’ into super is not taxed again as part of your income.

Secondly, your superannuation is a managed investment fund. As with all investments, time in market is the key.

An 18-year-old earning a modest $30,000 per year, making no additional contributions, will have $235,955 by the age of $65 - and that’s assuming your income never increases. Add another 5% of your income in voluntary contributions, which is just $1500 per year, and that balance goes up to $339,481.

If you wait 20 years until you’re 38, and start paying super on a much healthier income of $100,000, what do you have at 65? $371,700. That’s barely more than your teen companion who has been paying far less because that head start is everything.

Try the calculator for yourself at MoneySmart.

With all three examples, the lesson is the same. Start early, even if you have to start small. To quote Paul Kelly on the matter: from little things, big things grow. Little changes to your lifestyle now can help you hit those big wealth goals in the future.