What are you looking to achieve?
Your investment goals need to be specific and well thought out, clear and concise.
Never set vague goals such as “I would like to retire comfortably.” If you have vague goals you will also have a poor/vague out come.
You need to set goals like:
- I want to be debt free by age X.
- I want to have my home loan paid off before I am X.
- I will need $xx to retire comfortably on.
A clear and concise goal is the first step to becoming a successful investor.
The first big mistake made when investing is that the choice of what to invest in, is the first decision. You need to recognize that you have not made an investment choice but in fact you have been sold a product. This is generally a very bad start. Why? When you purchase a product (as the end user) all of the profit from the product has been made.
The choice of what you invest in should be the last decision made. In fact once you set your goals, work through your cash flow (budget) take in consideration taxation, fees and time needed to achieve your goals. The type of investment you need to achieve your goal will then be quite obvious.
What you invest in is the last choice not the first.
Let’s put this in action and look at an example:
You are 30 years old married with a couple of kids a home loan of $350,000 (which is the average home loan at present) both you and your spouse work and combined earn around $150,000 pa. You have $40,000 in super combined.
Goals are to pay out home loan and retire at age 65 with an income of $60,000pa.
Let’s work backwards.
Take home pay will be around $159,000pa. Home loan payments over 25 years $30,000pa. Super paid by your employer is $9,350 after tax in super fund. The expected return is 6%. So to achieve your goal you need investments, which will return 6% pa at least.
As you stand at present, if you pay the minimum payments on your home loan the interest bill over 25 years will be $392,000. By 65 your super should be worth around $480,000 in today’s dollars.
Step 1 is to pay of your home loan as fast as possible by increasing the repayments to $45,000 (a 50% increase) per year. You will pay it of in 11 years and save around $240,000 in interest.
Step 2 is to make sure that the extra $45,000 per year is being invested in either super or other investments. Given that you are now 41 years old and have 24 years to retirement if you put say $25,000 per annum into super this should boost you super to around $1,000,000 by age 65. A million dollars will produce $60,000pa for your retirement.
Now it is time to choose the investments that will best help you achieve your goal.
- Please note all figures are in today dollars and allow for inflation of 3%.