Your money doesn’t do much when you’re in your bank account – here’s how you can do more for your back. (Source: Getty)
What a wise money manager should, at a time when our savings are most preferred, is a bank deposit that rewards us with such a ridiculously low 1 percent interest rate (if you’re very lucky).
My ‘advice’ is: too wise!
In the most recent survey by the Westpac-Melbourne Institute Index of Consumer Sentiment, 28.7 percent of respondents said the “smartest place to save” was “in the bank”.
But while the bank was the most popular destination for savings, 12.1 percent of consumers today view the stock market as the “smartest” place to save. This is the highest value in a decade!
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So are these stock market enthusiasts wise or just sensible?
To answer this question, we need to find out what wise actually means. If smart means safe, then the 28.7 percent of Aussies who believe the bank is the best place for their money is on the money.
Up to $ 250,000 of a bank deposit is guaranteed by the state. For private customers, there is nothing like it except government bonds, which are more difficult to access than a good old bank account.
But if having a smart place for your savings is a vehicle for growing your wealth, forget about it.
A great industry that works over the long term super fund is a really smart place to grow your wealth. Since you have to leave your money there until you retire, it’s a pretty safe place to leave your money. Sure, value will go up and down with the insane moves of the stock market, but it will go up.
If you look at good super funds that are returning a long-term average of 7 percent, it means that if you deposit $ 10,000 today, I bet it will be around $ 20,000 by 2031.
It would be $ 40,000 by 2041, $ 80,000 by 2051, and I estimate about $ 160,000 by 2061.
How do I know? Well, if you have an average of 7 percent a year, your money will double every 10 years.
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Why? Mathematicians call this the rule of 72, where you divide 72 by 7 percent and get about 10. I will not argue with them.
Super is clearly a smart place for money. But what if you want to increase your savings but still have access to them, for example to buy a house?
You can use the First Home Super Saver Scheme which allows you to save by adding additional contributions to your super fund and then withdrawing it up to $ 50,000 plus earnings.
A couple could use Super to raise a $ 100,000 deposit. That could help them buy an asset called property that would grow their wealth over time.
Another good place for your savings can be Shares, but you need to be careful which stocks to buy.
Opting for tech stocks only, this could prove unwise, although I think high quality tech stocks will be important to our stock market in the decades to come.
History has shown that if you had a good exposure to a portfolio of stocks like the S & P / ASX 200 index, you would have gained about 10 percent per year over most 10-year periods.
However, it would have taken two to three years to get used to some great ups and downs in those 10 years. And sometimes a decade could even be less than the average decade.
Provided you can sleep at night when your nest egg crashes on quality stocks but then recovers over time, the stock market can be a smart and sensible place to grow your wealth. However, there is no government guarantee for a stock portfolio. But it is difficult to grow one’s fortune with a bank deposit.
If I assume a rate of 4 percent plus bank deposit interest, that $ 10,000 you saved would be $ 20,000 after 18 years and $ 40,000 after 36 years, and about $ 50,000 in 2061.
That’s a lot less than a super fund would give you, $ 160,000. And when you invest in stocks outside of Super, you get even more – possibly over $ 100,000 more, depending on how smart you are with your tax games.
As you can see, doing a little work on different ways to build your wealth can be a really smart thing.
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