Here is a breakdown of where my partner and I are currently at:
Just us two - no kids yet, aged 25 & 26.
After tax income: Me - $55822, Partner - $58708
Expenses are currently $50,000
As my partner is currently in the military we won't know where we will be living in Australia in the next year or two so we aren't too sure about real estate currently.
I'll try to give a more targeted recommendation. You're in an
amazing situation here!
Total income: $114,530
Expenses: $50,000
Savings Rate: 56%
Amount added each year to savings: $64,530
Monthly savings: $5,377.5
From the year you were born until today, the world stock market has grown 8.12% each year. This includes two major crashes, where stock prices were cut in half:
Note, the United States is half of the world's stock market, so 50/50 USA/International is considered a world portfolio. For you to mimic this, you would need 2/98 Australia/International (the Australian market is 2% of the world's market).
So let's take this 8.12% and see what would have happened if your parents saved $5,377.50 a month, from the year you were born, until today:
Final balance: $6,875,510.33
Of course, 26 years is a LONG time, and you'd prefer to not have to work that long, why else would you be on this site :-P With expenses of $50,000, you'd only need to save up $1,250,000. Once you've saved up this amount, you can live off your investments. You can literally schedule an automatic monthly withdraw from your portfolio that equals $50,000 a year, and treat it as your paycheck. This is what MrMoneyMustache means when he says to make your money work FOR you, instead of you working for your money.
So how long will it take to save up this much money, if you continue to save just as much, and continue to get 8.12% returns from the market? 11 years.
What if you can cut your expenses down to $40,000 a year? Now it will take 9 years.
$30,000 a year expenses? 6.5 years
Again, you're in an
AMAZING position!
The name of the game here should be mitigating your risk. If you can mitigate your risk, you're almost guaranteed to be a millionaire in very short order. In fact, it is almost a statistical certainty (assuming the future ends up being like the past) that you will end up even better than the forecasts above. MrMoneyMustache has a fun article where he shows the best/worst historical investment returns over the last X amount of years, and 8.12% is on the low-end:
Source:
http://www.mrmoneymustache.com/2011/06/06/dude-wheres-my-7-investment-return/The last 26 years just happened to have 2 major crashes, so this is quite literally the historical worst case scenario. Now for the meat of the conversation...
how do you mitigate your risk? Honestly, you're getting some bad advice in this thread. You don't mitigate your risk by:
- Leveraging - "Leverage is the only way a smart guy can go broke." ~Warren Buffet
When you're already on the path to almost guaranteed millions, leverage is the last thing you want, and a mortgage is one of the most misunderstood forms of leverage. I personally know people who lost millions this way. I know others who say they "signed my life away to a mortgage", after prices dropped and they couldn't afford to leave. Imagine being offered a significantly higher paying job in a city just two hours away, and being unable to take it, because you can't move. This is a life-altering mistake. - Using leverage to buy any asset (a home in this case), subject to the fortunes of one country, one state, one city, one town…No! One neighborhood! Imagine if our investment could somehow tie its owner to the fate of one narrow location. The risk could be enormous! A plant closes. A street gang moves in. An environmental disaster happens nearby. We could have an investment that not only crushes it’s owner’s net worth, but does so even as they are losing their job and income! (quoted from Why your house is a terrible investment)
- Purchasing individual stocks, or buying an active (non-index) fund - Any individual stock, can drop to 0. You can lose everything. Even worse, studies show you will underperform the index (the index is the combination of every stock available in the market). So not only are you putting yourself at more risk, you're doing it for lower returns. I personally know someone who lost over $10 million by picking the wrong active fund (a fund which had managers picking individual stocks). Lost, as in it went down to $0. Then there's the story of all the people who let Canarsie Capital manage their money a few months ago:
"Owen Li, the founder of Canarsie Capital in New York, said Tuesday he had lost all but $200,000 of the firm's capital—down from the roughly $100 million it ran as of late March."
Source: http://www.cnbc.com/id/102356275
Is this really a game you want to play? - Not diversifying internationally - Australia's economy is very heavily weighted towards two sectors, two sectors which command 87% of Australia's economy. 68% of Australia's economy is its Services sector (mostly Finance), while 19% is its Mining sector. The state of Texas has a bigger economy than all of Australia, I don't think anyone would consider themselves diversified if they only owned Texas stocks. Does anyone think owning 100% stock, in a retirement portfolio, containing only two sectors, is diversified? If so, more reading is required. In short, don't put all your money in the Australian stock index.
- Falling victim to Survivorship Bias - the single greatest fallacy in investing - Steer clear of all speculative behavior. Many posts in this thread show a gross misunderstanding of the fundamentals of economics, and Survivorship Bias. Expecting a commodity bubble to continue simply makes no sense. The recency bias is evident. We don't expect stocks and bonds to appreciate because of past returns, we expect them to appreciate, because of things like population growth, productivity, and production. A house doesn't do any of that. It does not grow and multiply. It cannot compound on itself. Here's the long term Australian housing price chart:
Let's break-down the years pre-2000:
I'd caution not to ignore the black line. This represents at least 80 years where the value of your home would be steadily declining. Definitely not where you'd want the majority of your net worth to be.
Now let's look at the green line. Had you bought in 1950, and held 50 years, you would have seen less than a 1% real return yearly on the value of your home. Had you bought in 1953, it'd be about a 1.5% real yearly return. During this span of 50 years, the first two decades would have seen a large drop, then a break even. 0 appreciation. Starting in 1970, you would have seen 0 appreciation for 18 years. Starting in 1988, you would have seen 0 appreciation for 10 years.
This is what we expect from a commodity. It's easy to fall victim to the Survivorship Bias. After any process that leaves behind survivors, the non-survivors are often destroyed or muted or removed from your view. The people who lost money on their homes, certainly aren't broadcasting it to all their friends. If failures becomes invisible, then naturally you will pay more attention to successes. Not only do you fail to recognize that what is missing might have held important information, you fail to recognize that there is missing information at all. The only reason anyone here is mentioning housing at all, is because of this part of the graph:
This is speculation, not investing.
I suspect this will all become clear after a day or two of reading. Again, you're in an incredible position right now, your focus should be on mitigating risk, and not making any big mistakes. Let us know if you have any questions! :)