The Wealth Creation Gap and an Accelerated Savings Plan

By Jennifer Lancaster

It’s a long lesson, but to see our money grow rapidly, we must first mentally prepare, learn, and realise the power of the gap. Of course, there are a lot of gaps that you’re probably thinking of: the gap between rich and poor, the gap in our bank accounts, the gap in our financial knowledge.
The importance of this gap first dawned on me as I read all the personal financial media I could find around two years ago. What Gap? The gap between what you earn and what you spend.
Have you tried sticking to a budget? “I tried that and it’s no fun”, you say? Would you consider saving 12 years (and over $100,000 in interest) off a 25-year home loan worth it? (Example assumes $4,000 per month net salary in account, $1,600 spending). A line of credit, or equity loan, is one reason to budget, but it really comes down to how you manage your gap. Without being mindful of your expenses, you will never be able to get ahead on a line of credit loan.
The difference between a wealth mindset and a struggling mindset is one of priority. Take our family’s unique circumstance: our income is about to nearly double thanks to my husband’s business success. Faced with this exciting prospect, many people would be planning purchases they had put off, holidays, car upgrades or second car, and have a distant goal to save the rest. Our challenge is to save the entire amount we do not usually get. Not only save, but to make it work harder in an accelerated growth plan. Our goal is to save close to $60,000 for a house deposit in only 12 months.
How does an ordinary housewife set up such a deal? I decided we would do well to invest in Property Securities (unlisted) and picked the best-performing Australian fund over the past 3 years. I know all the pundits tell you not to pick on past performance, but in this instance it was a good choice as these types of funds have only about one negative year in 20, and this one had steady growth.
Investing $3,500 per month combined with a regular monthly margin loan of $1,000 through an online discount broker, we will be able to set aside $39,500. The broker also refunds the 4% entry fee. After compounding, paying back loan and interest (not counting tax deduction), we will have around $62,000 (at 37% growth). So there we have our house deposit.
I am not saying that this is the only path to wealth, and I know we are fortunate not to really need the second wage, and even more fortunate that this fund did even better than projected. It is a calculated risk. But I am saying that putting some time into this sort of planning really could set you up for life.
You want to know something really wild? You can almost be a millionaire inside 10 years, without headaches or lottery tickets. Say you decide that you’re going to delay gratification for 10 years: no credit cards, no personal loans, no car loans, no flash new gadgets unless it’s budgeted for. You contribute $1,000 per month to a proven property or other fund, you borrow another $1,000 per month, (50% gearing ratio) and returns are kept at 23% after fees, over 10 years. To keep up this return, research, monitoring and switching occasionally may be necessary. After 10 years, starting with $1,000, you’ll have $857,700 (after paying back your loan). This is more value than the investor who carefully saved $2,000 per month for the same length of time and borrowed nothing. It represents a 514% return on equity. Ah, the miracle of compound interest.
If you want to know how I worked this all out, it’s a margin lending calculator at infochoice.com.au (Calculators> borrowing to invest > savings gearing calculator).
Some of my friends think saving and investing is beyond them. Well, living off a pension when I’m 65 would be beyond me; I like my luxuries and I intend on having them. Later.