Have you ever wondered what the best way to get rich is? As the saying goes, there's more than one way to skin a cat. And when we think of the path to wealth, well, according to an expert report in the Australian Financial Review, there are in fact, four ways to skin the proverbial cat.
In the report, the four paths to wealth are outlined as follows:
- Becoming a senior executive in a large company
- Specialise in a professional field until you can specialise no further
- Starting a business or pursuing music, authoring or art
- Saving and investing.
(I've thought of a fifth, but it involves gambling, so we won't mention that one).
Let's focus on the fourth field because it is certainly the most applicable to everyone.
The report outlines how saver-investors who consistently save more than 20% of their net income over a long period of time (living off 80% or less of your income) AND invest these savings into 'prudent' investments will eventually be rewarded with real wealth. According to the quoted study, "this chosen path took 32 years to accumulate an average of $US3.3 million ($4.9 million)".
While I don't think that getting to nearly $5 million is easy, if you use time and compound interest together with sound investment choices, it's certainly possible.
Here's how:
An average Australian full-time worker earns around $1,600 per week – or $1,200 after tax. If you take 20% of that salary ($240 a week) and invest that amount into an investment that earns a 10% rate of return from ages 25–65, you will end up with roughly $5.5 million dollars. Here's the kicker – if you do this for just another five years, that $5.5 million grows to nearly $9 million.
And if you think that 10% is a difficult goal to achieve, that's roughly what a simple, market-tracking ETF (exchange traded fund) like Vanguard Australian Shares Index ETF (ASX: VAS) or iShares S&P 500 ETF (ASX: IVV) averages over the long-run (with dividends reinvested).
Foolish takeaway
Consistently investing 20% of your money over 40 or 45 years doesn't sound too hard, but it is. The number of crises and cool things to buy that life throws at us are a constant obstacle to this goal (as is the temptation to sell your investments when times get tough). But with discipline and drive, this is a path to wealth that I think anyone can tread.
