Update No. 167 – 14/06/14

I will send out the ‘Offer to Invest’ this week. To anyone who wishes to receive the offer, but has not made contact with me yet, send an e-mail to Tony@eternalgrowthpartners.com to receive the offer e-mail.

The market has had the wobbles as it closes in on the end of financial year, and fell by a little over 1% this week, after a ½% fall last week. This drop through May and June has happened every year since I established EGP, and every year, I remind you this is an occurrence you should rejoice for it mean that my options for the capital you might commit at the next intake are improved. The more the market falls, the better the chance that I will be able to find a happy home for any new capital at a good rate of return.

I thought I’d talk briefly about the savings side of the wealth accumulation formula this week. Most readers of this blog probably focus mostly on the performance of savings. I like to remind my kids that if you can earn 10% annually, your money will double every (roughly) 7 years. With the average working life of say 42 years, that allows for 6 doublings if you can generate 10%. It means $1 you save in the first year of your working life will be worth $64 by the time you retire in 42 years.

But those dollars won’t get to work if you never save them, and just as importantly, if you wait to save them, the dollars you save mid-career are only worth 1/8^th of those you save at the start of your career (at the 10% compounding rate). So planning to do your saving early is the best way, because your money will work so much harder for you if it simply works longer.

The foregoing is a roundabout way of getting to the point; I have some people on the periphery of my social circle, whose savings habits I would like to talk about. A couple in their 30’s with extremely good earning power, I haven’t been rude enough as to ask, but I’d be surprised if they weren’t earning $400,000 pre-tax (even with Australia’s very high income tax, they should still have about $267,000 in after tax earnings).

However, with a mortgage on a property worth around $1m of most of the value of the property and some poor consumption habits, they tend to live a little bit week to week. Now I should point out, not week to week in the way the very poor do, but using credit cards to stay afloat and the like.

When I look at people like this, it beggars belief that they could live like that, but when you scratch the surface, you soon find out why. With an almost 200 pair collection of shoes with an average cost probably exceeding $500, Mrs X. has blown circa $100k on uncomfortable (but attractive and stylish) shoes. Add to that a handbag collection I’d be surprised if it wasn’t worth at least 1/3 of the shoes and a whole year of that very high after tax salary has been blow before you even get to living costs.

It is for this reason that the Government had to instigate the compulsory superannuation guarantee. The median Australian simply didn’t have sufficient self-discipline to save properly for their own retirements. It is because they are putting away about $35 or $40k in compulsory superannuation guarantee, that Mr & Mrs X above will end up retiring very wealthy despite their poor discipline, simply because of high earning power.

Particularly for the young though, that reinforcement of the value of saving young is so valuable. If you are 20 and can achieve 10% per annum, every dollar you save today will become $72.89 by the time you’re 65. If you can find a way to get 15% annually, it will become $538.77. You don’t need to save a great many dollars as a 20 year old to ensure a good retirement, but if you let yourself fall into poor discipline like Mr & Mrs X, you could just find retirement is much less kind than you expected – Tony Hansen 14/06/2014

EGP Fund No. 1 Pty Ltd. Up by 3.06%, leading the benchmark by 0.10% since January 1^st. Since inception, EGP Fund No. 1 Pty Ltd is Up by 69.33%, leading the benchmark by 40.35% all-time (April 1^st 2011).

^{*1 after 31May 2013 dividend of 2.333 cents per share plus 1.000 cent per share Franking Credit & 31 May 2014 Dividend of 7.000 cents per share plus 3.000 cent per share Franking Credit}

^{*2 calculated based on dividends reinvested}