Where to start – A member story

A question that is often asked in these forums is ‘How do I get started in investing?”. I thought it would be interesting to share my journey, it’s a story of the slow burn approach to wealth accumulation, but the snowball has grown to a sizable value.

I turned 40 this year which is a milestone in life. Another milestone I achieved was clocking up a $1 million net worth.

When I started investing (with my wife) we were 23 years of age. We completed a balance sheet in July 2001 and had a net worth of $45,000. It’s taken us 17 years of sticking to a simple set of investment rules to grow this to $1,000,000:

1. Spend less than we earn
2. Save at least 10% of our take home pay (after tax, super etc)
3. Invest in appreciating assets
4. Become the expert

Point 1 – Spend less than we earn – We also completed a cash flow statement back in 2001 and have updated it annually since. We know how much we earn (from rent/dividends and wages). We use this cash flow to frame decisions we make, such as should we buy a new car, should we invest in (XYZ) etc. The cash flow statement guides our decisions.
Point 2 – Saving at least 10% of your net income is key. If you make $1,800 a week take home, and save $180 a week, in a year you will have saved over $9,300. At this rate you will have a 20% deposit for a $200K property in less than 5 years.

We have actually saved 50% of our combined incomes since our mid 20’s. This has been the core of our net worth growth. Saving over $20K a year for 15 years has totaled $300K even before investment returns (see part 3).

Part 3 – This is the fun part, learning to invest.
We follow a strict positive geared model for real estate investing (some what inspired by Steve McKnight). Our model is that the rent from a property must cover all costs, including 80% loan value (we fund the 20% deposit from wages), insurance, rates, body corp etc.

I must have analysed over 500 real estate deals over the 17 years, offered on around 100 and actually purchased 7. At the moment we own 3 x investments properties and own the house we live in out right (worth $500K).

I sold a bunch of real estate and managed funds around 7 years ago to fund the house we live in, it made sense to pay that non-tax deductible asset off ASAP. Now that has been achieved we are accessing the equity to fund the 20% deposits for the investments.

Point 4 – Become the expert. In 2012 I completed a Bachelor in Commerce (Economics) and I am now completing a PhD in Economics and Finance. I have taken my lived experience and leveraged it into a formal qualification. The best thing about studying economics is that I understand the mechanics of financial markets and can analyse the impact of proposed changes. I don’t rely on the media (which often get it wrong) or other ‘experts’.
Books to read.

I have a few books I swear by. These have achieved a ROI of infinity for me. Seriously, for less than $100 you can get all the tools you need to become a millionaire! (you can grab all of these for under $10 from Op Shops).

1. The Richest Man in Babylon, George S Clason – the basic business model as outlined above, save 10% of your income and invest it intelligently

2. The Intelligent Investor, Benjamin Graham – Revised Edition – With the forward by Warren Buffett – Warren Buffett recommends the average investor use index funds to invest in the share market, I followed this advice and have reaped the dividends (incidentally Benjamin Graham’s writings inspired me to complete my Bachelor and PhD)

3. Money Secrets of the Rich, John Burley – This is the book that set out our Balance Sheet and Cash Flow budgeting approach. Includes the 7 levels on investors – http://belnapfamily.net/teach/7Levels.pdf (This book overall is a little dated, but the first half sets up the model to become a serious personal investor).

4. Any 2nd hand uni text book on Financial Planning (this is a big one for me) – Financial Planning is really quite simple for most people. You just need to learn about the risk profile of asset classes, decide on you time frame for investing and set you mix of assets to suit. And there are really only 3 asset classes Cash/Bonds, Shares and Real Estate. In my opinion the other asset classes (hybrids/options and other high risk tools) benefit only the person who collects the fees (Don’t buy the latest financial planning text book, just get a cheap one from an Op Shop – they are all the same, but trust me read it, understand it and become the expert).

What has following this road achieved for us?

Beyond the $1M net worth the biggest thing we have achieved is flexibility. We traveled around Australia for 4 years between ages 25 – 29, sometimes not working for up to 6 months. Our net worth kept growing during this period as we had real estate and shares working for us. I worked part-time for 4 years before my kids went to school, while they were young and wanted me around (ha ha).

I work full time right now as I am growing my real estate portfolio again (the prices are so good right now). My goal is to secure 8 positive geared properties and then go back to part-time work.

We will retire at 50, which is a great achievement for us, starting with $45K as 23 year olds in 2001 to self-funded retirees, using simple investments, taking only small amounts of risks… our journey to millionaires is one of a snowball, and with compounding working for us now the sky’s the limit.