01 Jun Building your nest egg
The Master Plumbers have published Matt’s article titled “Building your nest egg” in Australia’s leading plumbing magazine “Australian Plumbing”. Building your nest egg is approximately a 2-minute read on taking care of your financial future. To read the full article navigate to the magazine via this direct link Building your nest egg . Or, read below. Enjoy…
With the end of the financial year looming, you might find your attention turning to your savings situation. Australian Plumbing Industry magazine regular Matt Reynolds talks goals and savings targets and why it’s better to get a headstart to feather your nest for the future.
Most of us realise that we need a stash of money we can draw on if we expect to live out our golden years of retirement ordering Pina Coladas from a beachside bar. Furthermore, we know that our ability to build and grow our nest eggs will not only determine the quality of our beach years, but how soon we have the choice to hang up our boots.
Money, in my opinion, is not the most important thing in life, but it does give you choices. Having the basics covered is a prerequisite for a healthy and happy existence. Not many of us plan on working 40+ hours a week for the rest of our lives, so sooner or later we all ask ourselves the same big question: how much do we need?
Everyone’s situation is unique, so you do need to seek your own advice, but it’s generally accepted in personal finance circles that with roughly 25 times your annual expenses invested and without any drastic changes in spending habits, you can put down the shovel for good and never run out of money. That’s 25 times your expenses, not income.
If you can keep your spending under $25K a year, you’ll need $625K before you plan to sell your tool box. Spend $50K a year keeping the fridge stocked and the Hilux full of gas? Then you’ll need $1.25M. $100K? Then you’ll need $2.5M. You get the idea.
These numbers shouldn’t scare any of us because, as plumbers, we have two significant advantages when it comes to money. Firstly, we get paid to learn so we have money early in life. From day one, we receive a wage and are not required to begin our working lives in debt with huge student loans hanging over our heads. Secondly, we have time on our side and – thanks to the magic of compound interest – a rock solid financial future is almost guaranteed if we start saving early and remain consistent.
Let’s assume one chilly winter’s morning you grab your fixie and pedal your way to your first day on the building site as an 18-year-old. You work hard, collect your wage and on Friday afternoon commit to putting $70 aside each week for your future. You find a basic share fund returning 10 per cent and automate your weekly payments. Eight years later you stop your contributions and leave the approximate $45K you have accumulated so far in the account. You forget all about the investment.
That’s a pretty healthy stash at 26, remembering that you also have your compulsory Superannuation accumulating in the background as well.
Then, at 26, one of your mates cottons on to your little savings system. So impressed with your progress, he starts putting away $70 a week for himself and gets a little waddle in his stride with the thought of all those cocktails you’ll enjoy together on the beach.
There is, however, a little problem. Even if he continues to invest $70 each and every week for the next 39 years until you both reach the implied retirement age of 65, his account balance of $1,589,733 falls well short of your own at $1,863,287, a whopping differential of $273,554 (or almost 14,000 Pina Coladas).
Contributing 75 per cent less money in 75 per cent less time, you’ll still own a bigger account. That’s the power of compound interest. For the highest probability of the biggest nest egg, you need to start early, save as much as you can and invest the money for the long haul. Ironically, the seeds of lavish retirements are most effectively planted as near broke apprentices.
Even with time and money on our side, it can still go wrong if we don’t guard our investments closely. A nest egg is built in the gap between your income and expenses, the higher your income and the lower your expenses the faster you’ll accumulate money (which is probably much more than $70 a week if you spend money wisely and keep your costs low). Keeping your expenses low means paying very low fees and being tax efficient.
You’ll need to get your own advice on both but be aware, the financial industry generates a huge amount of their revenue through fees. It’s unfortunate but you don’t always get what you pay for. Often, it’s quite the opposite, lower cost funds actually produce higher returns simply because they have lower fees.
You don’t have to be unbelievably smart or have a bunch of letters following your name to win the game of money and build yourself a healthy nest egg. Start as early as you can, save as much as you can, automate your plan and keep your expenses low.
Just think of investing like a standard work day, if you show up early, keep chipping away, avoid distractions and skip lunch every now and then, good things tend to happen.
Matt Reynolds is an award winning plumber who writes about the game as an industry insider. He hosts the Trench Talk podcast which is available on iTunes and most podcast platforms. You can connect with him on Twitter @MrMattReynolds or find him as the Director of XRM Plumbing Services on LinkedIn.