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I like Noel Whittaker, even if he is an ozzie.

Bloody sensible bloke.

********************************

Taking the Train to Wealth

Back in 1990, when I wrote my second book “More Money”, I included a chapter called “The Fairy Godmother and the Magic Train”. The intention was to show the power of compound interest and it told a fable about a fairy godmother who visits all new parents to tell them about a “train” that could take the child to wealth.

The fare to take the journey is just $2.74 a day ($1000 a year) provided the parents start immediately, and the payoff is that the child should have over $6 million at age 65 which is the end of the journey. The figures are based on the assumption that the money is invested in quality share trusts, and that these trusts earn an average of 10% per annum if all income is re-invested.

A seat on the “train” costs virtually nothing if they start paying that $1000 a year from year one. However, as each year passes its value grows as compounding works its magic. Therefore a person who delays starting the program will have to pay an increasingly heavy price to join the “train” if they wish to have the same sum at age 65 for an investment of just $2.74 a day.

Time passes quickly. This month we found ourselves celebrating the 21st birthday of our youngest child. It only seems such a short time since we had three children under four – now they are aged 21, 23 and 24.

Yes, the magic train is a great concept - unfortunately, like most people, I never “got around” to starting. However, being one who likes to ponder on what might have been, I did some calculations to find out what the outcome would have been if I had made the time to invest that paltry $1000 a year into a managed fund that matched the All Ordinaries Accumulation Index.

The eldest, now aged 24, would have $164,000, the second would have $122,000 and the youngest who just turned 21, would have $89,000. Notice the impact of time on the investment. Because the youngest is four years younger than the eldest, her theoretical portfolio would have been worth about half as much as his, because the length of time of her investment would have been four years shorter.

It encouraged me to do some more calculations. If we made no more contributions to the eldest son’s $164,000 portfolio, it would grow to $8.8 million at age 64 if the investment could average 10% per annum.

That’s a return of $8.8 million for a total investment of $24,000 (24 years x $1,000).

Now think about somebody who is reading this, who is aged 24 and becomes sold on the idea of having a portfolio worth $8.8 million in 40 years time. Because they are starting from scratch they have to invest $1,380 a month ($16,560 a year) to reach their target of $8.8 million.

Yes, the person who put away $1,000 a year from birth and then stopped at age 24 outlays only $24,000 for a return of $8.8 million. The one who delays the program and then starts at age 24, has to find a staggering $662,400 to end up in the same place. This is the cost of delay.

Naturally this raises the question that we must all ask ourselves – why don't we start these programs? Probably because deep down we all have an active “impatience” gene that makes us resist any course of action where results only appear over time. It’s easier to choose a harsh “lose three k’s in seven days” diet, than one that requires a slight adjustment to our eating habits that will result in our losing six kilograms in 12 months.

There is also the age-old problem of getting so involved in immediate problems that we neglect planning for the future. Maybe, with a new financial year beginning, it might be a good time to reflect on what we have done in the last 12 months to get some money working for us. Remember, the three main places money can come from – you working, your money working, or from welfare. Welfare is being continually tightened so if you intend to ever give up work it makes sense to start accumulating some capital for your retirement as soon as you can. The earlier you start the easier it is.

---------------------

Noel Whittaker is one of Australia's leading Financial Advisors and he has written 13 best selling books including 'Making Money Made Simple'.

Noel Whittaker is Joint Managing Director of Whittaker Macnaught Pty Ltd,

AFSL Number 246519 – email noelwhit@gil.com.au

www.noelwhittaker.com.au.

“This advice is general in nature and readers should obtain their own expert advice before making financial decisions.”

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I have a couple of questions:

Where could you get 10% year-on-year these days?

And what about inflation - what would the real effect over the term of the investment?

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I like Noel Whittaker, even if he is an ozzie.

The fare to take the journey is just $2.74 a day ($1000 a year) provided the parents start immediately, and the payoff is that the child should have over $6 million at age 65 which is the end of the journey. The figures are based on the assumption that the money is invested in quality share trusts, and that these trusts earn an average of 10% per annum if all income is re-invested.

A seat on the “train” costs virtually nothing if they start paying that $1000 a year from year one. However, as each year passes its value grows as compounding works its magic. Therefore a person who delays starting the program will have to pay an increasingly heavy price to join the “train” if they wish to have the same sum at age 65 for an investment of just $2.74 a day.

Time passes quickly. This month we found ourselves celebrating the 21st birthday of our youngest child. It only seems such a short time since we had three children under four – now they are aged 21, 23 and 24.

Yes, the magic train is a great concept - unfortunately, like most people, I never “got around” to starting. However, being one who likes to ponder on what might have been, I did some calculations to find out what the outcome would have been if I had made the time to invest that paltry $1000 a year into a managed fund that matched the All Ordinaries Accumulation Index.

The eldest, now aged 24, would have $164,000, the second would have $122,000 and the youngest who just turned 21, would have $89,000. Notice the impact of time on the investment.

Alternative scenario 1 : from here on in: the year is 2000 and within three years their money is halved.

Alternative scenario 2 : from the start they lived in Japan. The 24 year old now has $12,000, $12k less than had he have put it under his mattress.

Now if you could guarantee that 10% a year for sod all effort, you'd have a client.

Does this not remind everyone of the child trust fund? Should do.

My 3 year old has nearly £6K saved.

Good for you for spotting a one-way bet. If only I could convince the authorities I am a child (Oi! I heard that!). B)

Edited by Sledgehead

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I like Noel Whittaker, even if he is an ozzie.

Bloody sensible bloke.

Exactly what is sensible about that load of rubbish? You cannot get a 10% nominal yield pretty much anywhere, and especially not in investments where the mean time to default is measured in decades rather than months. It is even less possible to get that yield after tax and inflation. Frankly, that article sounds much like: if only we had "free energy", we could do lots of cool stuff.

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  • 302 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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