On Sunday we celebrate the 30th anniversary of my book Making Money Made Simple, which was launched in 1987, and has sold over 2 million copies around the world. It’s fascinating to look back 30 years and think about what was like at that time.
Inflation was running at 8 per cent, the cash rate was 11 per cent, and the standard variable rate on a housing loan was 15.5 per cent. That sounds astronomical today, but remember in 1987 the average Brisbane house cost $62,000, which was 2.6 times the average income of $24,000 a year. Today, at $500,000, the average house is equivalent to approximately six times the average full-time income of $80,000 a year.
The 1987 edition of the book had an example of a couple on the average wage who bought the average house and, using one wage to pay off the mortgage, were free of debt in five years. It’s an indicator of the escalating cost of home ownership that, using the same figures today, the average couple after 10 years have just reduced their mortgage to a level where it could be serviced on one income. And yet interest rates in 1987 were three times what they are now.
It does make me extremely concerned when I hear reports in the media that mortgage stress is the worst it has been. If that is the case when interest rates are at historic lows, imagine the chaos if there were substantial rises.
In the book I pointed out that both shares and property, if carefully chosen, had potential for good capital gain: that certainly proved to be correct. Thirty years ago the n All Ordinaries Index was 1765 – despite a series of crashes since then the index has increased three-fold today to almost 6000. But that does not take income into account. If you had invested $50,000 in January 1987 in a fund which matched that index, and reinvested dividends, your portfolio would now be worth $625,000, a return of 9 per cent a year compounded.
But a major theme of the book was fundamental principles, and they have not changed. In the latest edition, just like in the first one, I point out major handicaps to financial independence, such as confusing a good current income with financial independence, the absence of goals, and the “must have now mentality”, which leads people into debt because they borrow for items instead of saving up for them. I also explain that a major difference between financial winners and financial losers is that winners borrow at low rates of interest (tax deductible) to acquire assets like property and shares that tend to rise in value – the losers borrow at high rates of interest (non-tax deductible) for items such as cars and furniture that fall in value.
And, as longtime readers would know, I continually stress the importance of understanding compound interest. To put it simply, how much you have at the end of the investment period depends on both the rate of return, and the length of time the investment program must be in place.
In 1987, I illustrated this with a riddle about a lily in a pond. If the lily starts as a tiny speck, and doubles every day, how long would it take to go from filling a quarter of the pool to filling it all? The answer is two days. It would go from a quarter to a half on the ninth day, and from half to completely filling the pool on the 10th day. Imagine if that lily was your savings program and you had to stop on the eighth day because you retired. You would have lost three quarters of what you could have achieved if the time was just 20 per cent longer.
Yes, 30 years have passed, and economic conditions are dramatically different. Nobody knows what they might be in another 30 years – what we do know is that fundamental principles never change. As always, follow the fundamentals, and success is virtually assured.
Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. Email: [email protected]苏州夜网.au