Most people make life more complicated than it has to be.
Take investing for example.
All the bullshit “investments” that people get excited about.
Rare metals, diamonds, crypto, mining penny stocks, CFD’s, forex.
What a load of horseshit.
I know of no-one who is seriously wealthy that gives a hoot about any of these things.
The only people that I come across that are involved in speculative punts are generally either happy or sad, broke or temporarily ahead depending on what the market is doing on the day.
You know what I find so dumb about gambling like this?
The investor’s success is wholly and solely dependent on there being someone else who is gullible enough to buy the “thing” off them at a higher price at some point in the future.
For the record, I own nothing that is speculative. I was lucky to learn my lesson in my late 20’s and I’m all the more financially secure for losing the $30k or whatever it was back then.
Having my money out of my control gives me anxiety.
I like boring.
As one of my rich mates says “exciting life, boring investments”. I love that.
Boring is consistently committing a percentage of your income to a low-fee index fund.
Boring is taking the painstaking hours to research undervalued, profitable companies that will give an out-sized return in the next 10-20 years (when you need the money).
Boring is pottering around to find that elusive property with a gross yield of 8% plus a steady 4% capital growth rate.
But you want to know my favourite, and the most boring of boring?
Wait for it….
Making a consistent extra contribution to your offset or loan account whenever you get paid.
The maths makes sense, and maths is what investing is all about.
It’s simple. Take a loan at 5% for example.
Consider that the minimum contractual repayment has been made. Put that to the side for a minute.
Okay, so now you put an extra $2,000 into the account each month. Over the course of the next 5-years, that compounds to $139,000.
Basically a really boring $17,000 profit.
A couple of things are happening here which most people don’t consider.
Stay with me…
To have earned that $17,000 after tax, you would have needed to earn $26,000 (assuming an average tax rate of 35%)
Remember, you do not pay tax on interest that you save. You pay tax on interest you earn. You need to remember this.
In other words, you would need to have discovered a GUARANTEED investment yield of 7.5%. Guaranteed being the operative word. Good luck with that.
Here’s the second part of the picture.
You’ve got that compound interest working in your favour to get you out of debt sooner, freeing up your cash flow sooner to invest further.
Let’s imagine we apply the above scenario to a standard $700,000 mortgage on a 25-year term.
But you decide to make a consistent $2k commitment each month for the life of the loan, come hell or high water.
Scenario a) Where the mortgagor doesn’t make the extra repayments and goes seeking “higher return” somewhere else. They make the minimum repayment.
We’ll call him Mr. Exciting.
The numbers are thus:
Borrowed: $700,000
Repaid: $1.228m
Interest cost: $528,000
Years income is tied up servicing debt: 25
Real interest rate is therefore ($528,000/$700,000) x 100 = 75.4%
Pre-tax interest cost is therefore $528,000/0.65 = $812,000
Totally awful. So hideously ugly and unpalatable that 99% of the world sweeps this truth under the rug.
Scenario b) Where the mortgagor makes a conscientious $2,000 extra monthly repayment, is boring and sticks to their knitting.
Let’s call her Miss Boring.
Borrowed: $700,000
Repaid: $955,000
Interest cost: $255,000
Years income is tied up servicing debt: 13.2
Real interest rate is therefore ($255,000/$700,000) x 100 = 36.4%
Pre-tax interest cost is therefore $255,000/0.65 = $392,000
What Miss Boring saves compared to Mr. Exciting: $812,000 – $392,000 = $420,000 of before-tax money.
And, she saves 12 years of servicing a loan.
And she can start properly investing in real assets 12 years earlier, like that boring 6% p.a. Index fund.
So let’s play this out then. Miss Boring person invests their mortgage repayment of $4,100 plus the $2,000 monthly extra for 12 years.
The return, before tax is a pretty neat $362,000 with an accumulated $878,000 principle balance for a total lump sum of $1.25m thank you very much.
So in that 25-year period, the boring person owns their home outright, saved $420,000 of earned income and then made a cool $362,000 almost passively.
It would appear that Miss Boring is now Miss Money Bags. Or Miss “I don’t have to work anymore”.
Can I get an amen for that?!
For the record, I’m not encouraging index funds, I can’t legally tell you what to do with your cash, but it’s a pretty clear demonstration of the boring (aka Buffet and Monger) strategy paying off safely and very handsomely indeed.
The biggest problem the Miss Boring will have? Having nothing to contribute to the (utterly boring) crypto and speculative punt conversation.
At least she can confidently call herself an “investor”.
Brodie Brown
Professional Mortgage Broker