Why Women Should Collect Houses
By Debra Lohrere © 2002
Editor’s Note: Although this article is primarily written
to Australians the principles apply equally to others around the
world. if you remember Superannuation is retirement fund.
We can no longer rely on the government to hand out an old aged
pension cheque to us once we retire. We cannot take for granted
that at the end of our working life we will be taken care of financially.
The Australian population, as with that of many other nations,
is ageing, due to the baby boomer generation, and within 30 years
there will be so many retired people, compared to the number of
working age people, that it will be economically impossible for
the government to afford to provide any reasonable source of monetary
assistance for the elderly.
The government has realised this, and that is why they introduced
the compulsory employer paid superannuation scheme and are even
now beginning to give financial incentives to Self-funded retirees.
Most of us have never sat down and even considered the ramifications
of why the compulsory super was introduced and for many of us it
is a matter of too little too late. Even for the young women in
our society – who have a full working life ahead of them,
they still cannot rest assured of a comfortable retirement.
Why is this? It is because that unfortunately even with contributions
at the current level of less than 10%, someone on an average wage
who works continually for 30 years, is still going to find themselves
trying to survive on an income equivalent to less than $20,000,00
per annum in today’s dollars.
You will notice that I said continually working for 30 years.
This is another reason why women are particularly disadvantaged,
firstly because they often have to take up to ten years leave from
the workforce to raise children, secondly because women in general
earn less than their male counterparts and thirdly because an enormous
proportion of the women in Australia, will never have received
any previous superannuation contributions, prior to the compulsory
superannuation being introduced, and will therefore not have had
contributions made over their entire working life so far, giving
them even less to fall back on by the time they retire.
Many women may previously not have thought of lack of superannuation
contributions as being a problem, as their husbands may have been
contributing to super since they first began work. Unfortunately
though with the high number of divorces in this country, it is
unwise to rely on the fact that your partner’s superannuation
will be there for you in your retirement years and even if a large
proportion is awarded in a settlement – that it will be sufficient
to sustain a comfortable retirement for any length of time.
All of these factors are why women now more than ever, need to
begin taking action to build up a source of ongoing income, that
will grow to such an extent, as to be able to provide a secure
and happy future for themselves and their children.
It needs to be a source of income that is unrelated to physical
work…that is an income that is generated from income producing
assets – and not from our personal efforts.
One of the best sources of creating this ongoing income stream
is to begin building an investment portfolio property, also aptly
paraphrases as bricks and mortar.
We need to start collecting income producing assets now, so that
they will have time to grow and develop so that we will be financially
independent for our retirement years.
Property is one of the best types of income producing assets,
mainly because through gearing, which is borrowing other peoples
money to supplement our own, we are able to control assets of a
far greater value, and benefit from the growth on the overall value,
including the borrowed portion, in contrast to only benefiting
from the growth on the small portion of our own money contributed.
For example, if you have $10,000.00 invested at 7% compounding,
then in ten years it will grow to around $20,000.00. If on the
other hand you have used that $10,000.00 as 5% deposit on a $200,000.00
property, which grows in value by 7% per year, then after ten years
the property would have grown in value to nearly $400,000.00 giving
you a profit of almost $190,000.00 instead of a profit of $10,000.00
had you just invested your own money. After 30 years your money
alone would have grown to just over $76,000.00 and the geared property
would have grown to more than $1.5 million.
This example of course has not taken into account the initial
purchasing costs involved to secure the investment property, nor
has it taken into account the rental income that you would also
be receiving….I have simply used it to demonstrate that the
more assets that you can get working for you, the better off you
will be.
Furthermore, if you already have equity built up in your own home,
it is possible to purchase an income producing property, without
even having to outlay any cash whatsoever.
I would like to explain to you the miracle of compounding interest – because
this is the major factor that allows an average person to create
a source of immense wealth. It is a little understood concept that
can have a huge bearing on your future, once you understand how
it can best be utilised.
Compounding is the effect of letting something grow, and then
rather than taking away the newly created amount, you leave the
whole thing in tact, and allow further growth to take place on
the entire amount, and so on. Effectively making it grow exponentially.
For example: If you have $1,000.00 that is growing by 10% per
year due to interest received. Then you have two options, you can
withdraw the income of $100.00 that has been generated, or you
can leave it where it is, and allow it to compound (earn interest
on interest),
If you allow it to compound, then in the second year you will
get an income of 10% of $1100.00, which is $110.00, instead of
$100.00. This may not sound like much, but the longer you leave
the money to compound, the larger it will grow. As each year passes
it will grow by a larger amount, in fact after 10 years it will
be worth $2,593.75 and after 40 years it would be worth a massive
$45,259.42. Remember that if you had withdrawn the $100.00 interest
each year for the same period 40 years – then you would have
received only $4,000.00 and would still have the original $1000.00,
being a total of only $5,000.00. This means that by letting it
compound you would have earned more than an additional $40,000.00.
One of easiest ways to calculate how compounding interest works
with different rates of return is to become familiar with the Rule
of 72.
This rule states that “The number of years that it will
take for your money to double is 72 divided by the interest (growth)
rate”.
Therefore if you have $1,000.00 invested at 10% interest, then
the number of years that it will take for your money to double
to $2,000.00 is 7.2.
72 divided by 10 = 7.2
If your money is invested at 7% interest, then it will take approximately
ten years to double in value. If it is invested at 5% it will double
in just over fourteen years.
The two most important aspects of compounding are one: rate and
two: time.
The higher the rate and the longer the time something is left
to compound, the greater the final result will be.
This is why the sooner we start investing, the better.
Debra Lohrere's latest book "How to Research
and Purchase Investment Properties" is available on line.
View free sample pages at http://members.optushome.com.au/dlohrere/ It
is required reading for any new or aspiring property investor.
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