Do you ever see some statistics that make you want to just give up and stop trying to get ahead financially?
It is hard not to sometimes, given the waves of stories about how much super you need to have for your age group or how much property has gone up.
A recent analysis by KPMG was particularly tough reading for some, in the way it described how one particular group aged between 25 and 34 today had managed to grab a 63% wealth increase in just five years – the best return of any generation over that time period
They were the fortunate few who had bought a property in that period when interest rates were particularly low as the pandemic tailed off and had leapt ahead of the rest of those in their age group who are somewhat disparagingly called part of “generation rent.”
Opportunity Lost or Lesson Learned?
With national property prices now close to having risen by 50% since March 2020 and interest rates having risen by more than 3%, this analysis is looking at an opportunity that has literally already flown out the window for most and is really only useful as a tool for discouragement and dire comparisons for those left behind.
Rather than being caught up in analysis of the recent past and what you “shouda, woulda, coulda” done to create wealth, it is much more productive to make the often small but important changes that ensure your own financial future becomes brighter.
The Benefits and Dangers of Leverage
What the KPMG figures are actually showing is the benefits of leverage or debt and the dramatic way it can change your fortunes when asset prices rise.
If you buy a property for $1 million with a $100,000 deposit and its value rises by 50%, then the return is greatly magnified.
While the overall price is now $1.5 million, the gain of $500,000 is a whopping five times the deposit invested – minus, of course, the rising interest costs on a very large loan.
The problem with this example is that property is often an “you’re in or you’re out” sort of investment.
It involves such large amounts that getting the deposit together and servicing the loan will dominate household finances for decades to come.
How to Cope with Missing the Bus
So, assuming you have “missed the bus” on a once in a lifetime, pandemic induced opportunity to buy at lower prices with ultra-low interest rates, how do you not give in to the bleakness of comparison and the regret of missing out?
The answer is in learning the lesson of leverage – without forgetting that debt is often dangerous and leverage magnifies losses as well as gains – and applying it in a manageable and bite-sized way to your circumstances.
There are a multitude of opportunities that would have produced similar or better returns to the pandemic property leap such as buying BHP shares or gold over the same time frame without the need for the massive debt levels needed to break into the property market now.
Managing a Margin Loan
A well-managed margin loan over a basket of shares, including property shares, allows you to start small, learn lessons of diversification and have the benefit of tax-deductible interest.
Over time, you can grow the size of the basket in a manageable way and avoid margin calls by keeping the debt levels reasonable, enjoy the experience of getting dividends and using them to buy more shares and perform tricks such as pre-paying the next year’s interest in June so you can claim an almost instant tax deduction is your tax return.
A Mortgage on L Plates
Building up a nest egg this way is also excellent training for managing a mortgage down the track and should be a superior way of saving for a deposit due to the power of leverage to increase returns.
Other tactics include using exchange traded funds with inbuilt leverage, using insurance bonds that are tax free after ten years, contributing more to super or, of course, continuing to save up for a deposit on a property.
The important thing is to continue taking manageable steps to improve your financial future and not let the disappointments of comparison cloud your judgement.
