The Power of Five Years

NATHAN is a mate of mine. He’s been angry since the early 90s.

He spends his day listening to redneck talkback radio, and each time I see him we have the same conversation:

Nathan: “Things aren’t looking good. Our retailers are hitting the wall, jobs are being shed, manufacturing’s shot, and the world’s biggest carbon tax is soon going to hit us between the eyes.”

Barefoot: “You have a portrait of Tony Abbott above your bed, don’t you?”

And on it goes. Nathan is convinced we’re heading for a financial depression. Yet he’s never read an economics text in his life. He’s really just parroting back what he’s been hearing.

As a crusty old newsman once barked at me, ‘If It bleeds, it leads’. News programmers (and politicians) understand that the most effective way to grab, and hold, our attention is by scaring us. This explains why right now everywhere we turn we’re faced with doom and gloom about the economy. Increasingly we live in a culture of fear.

But if you’re going to become financially successful, you need to understand that fear doesn’t serve you. It drives the media. It drives politics. And it drives the economy. Just don’t let it drive you.

And Now For Some Good News

Let’s face it – as a nation we’re kind of like the Kardashians: incredibly rich, not particularly productive, and we go on silly spending sprees (like the National Broadband Network) and get away with it because we were born with some red hot ‘assets’ everyone wants. Here’s why the future’s so bright we have to wear shades (or mining hard hats).

“We have an incredibly strong economy”

A ham sandwich could run this economy and it would still go gangbusters. The mining sector not only pulled us from harm’s way four years ago, it’s meant that today’s 21-year-old uni graduate has never experienced a recession.

“Unemployment is incredibly low”

Our unemployment rate of 5.1 per cent is the envy of the world. In the US it’s 8.3, in Greece it’s 21, and in Spain it’s 23. While the strong Aussie dollar is reshaping our workforce, retrenched workers can walk into another job.

“Our interest rates are some of the highest in the world”

Most coverage of interest rates is ‘boo, hiss’, but high interest rates means our Reserve Bank can stimulate the economy if need be, and savers can earn a decent return. (Spare a thought for a retiree in America earning 1 per cent on their dough.)

“We’re the richest people on earth”

Aussie adults are worth nearly four times that of each US adult. Even if you don’t feel rich, you are. With mostly free healthcare, mostly free education, and a very generous social safety net, we’ve got it pretty good.

Trouble is, most people don’t see it this way. They try to get their finances in order but give up when they seem to be going nowhere. That’s because we all overestimate what we can do in one year, and underestimate what we can do in five.

THE POWER OF FIVE YEARS

Think back to where you were five years ago. For most people (including Kevin07), it looks a lot like today. Now I don’t know where the economy will be in five years, but one decision you make today can completely change your financial future.

In just five years you can:

1. Grow your super by $250,000

If you’re getting closer to putting on the sandals and socks, you’ve probably been worrying about your lack of super. If you’re over 50 and have less than a $500,000 balance, you’ve got the opportunity to screw down your budget (as a couple) and contribute up to $50,000 a year pre-tax into super.

Just make sure your fund is balanced (part cash, majority growth assets) and isn’t ripping you with fees, and in five years you can have an extra $250,000 in super – possibly more.

2. Buy your dream home

Yes, houses are outrageously expensive, but no one is holding a white fence picket to your head. If you want to buy a house, well, buy a house.

Open up a First Home Saver Account and get a (government guaranteed) 22.5 per cent return on the first $5,500. Every dollar thereafter should be put into a high-interest online savings account, earning around 5.5%.

A young couple can live off one wage and save the other. It’s an old-fashioned idea but one worth putting into action if you consider this: a couple earning $120,000 combined should be able to live off $60,000 a year and save the rest. In five years you’ll have $200,000 – a very nice deposit on your home.

3. Knock a decade and $100,000 off your mortgage

There are people in the early 90s who were hit with 23 per cent interest rates, but they sucked it up and got on with things. Just because the bank gives you 30 years to pay off your loan doesn’t mean you need to take that long.

If you pay an extra $500 a month off your mortgage, you’ll slash 10 years off the loan and save over $100,000 in interest. It’s like compound interest in reverse. And once you’ve paid off your home you’re on your way to becoming independently wealthy.

4. Build an entirely new career

I worked through university at a place where the full-timers made bitching about the boss part of their job description. That was 10 years ago. Today I’m told that most of them are still there, still dragging their feet to work.

Don’t be like them. Over five years you could gain a new qualification, learn a new skill, dramatically increase your earning power, and be on your way to doing something productive with your life.

5. Start compounding your wealth

Compounding is the greatest financial force on earth – it’s the great leveller of life in that it takes time, not large slabs of money, to make it work. Yet most people never get themselves into a position to make it work. Socking $1,000 into the market today and adding $500 a month could be worth $40,000 in five years – and $330,000 in 20 years.

I’m fully aware the economy faces plenty of challenges. But I also know the power of having a plan. So, I’ve told Nathan to stop worrying about things he can’t control and instead focus on a five-year plan that, if he sticks to it, will completely turn his financial life around. And yours too.

Tread Your Own Path!