We have seen that we can get a free $60,000 car by taking advantage of compound interest.
In this strategy we are borrowing money under the Pension Loan Scheme and invest money in the stock market.
After the first 5 year the loan exceeds the investment by a considerable amount but just because a little bit of extra return between 3.95% and 7% the investment will catch up with the loan in 13 years and makes you free of debt.
As a youngster I never took advantage of information about compound interest until many years later when I became an investment adviser.
Let us consider smoking
Say cigarettes cost $50 per packet and a 21 year old smokes a pack per day and spends $350 per week. This will service a loan of $250,000.
If the investment returns 7% it doubles ever 10 years
10 years $ 500,000
20 years $1,000.000
30 years $2,000,000
40 years $4,000.000
50 years $8,000.000
60 years $16,000,000
I smoked a packet a day at age 21 and I am 81 now, 60 years later . Nobody told me about this but I could have had $16m by now. Still have to repay the $250,000 but I can cope with that.
You may have problems with getting a $250,000 loan but you can buy bank shares on a margin scheme which means that the lender (stockbroker) uses the shares as security on a Loan to Valuation Ratio (LVR) of 70%. This means that if you want to buy $1000 of shares you need cash of $300. In other words every dollar you spend allows you to by $3.33 of shares.
This will add 5 years to the example, So instead of having $16m you would only have $14m. Hardly worth it.
In these equations I have only assumed a 7% in the growth of the shares . If we also take into account the dividend of the shares it will increase wealth considerably.
At a 3% dividend the doubling reduces from 10 years to 8 years , now giving you 32M in retirement
At a 7% dividend the doubling reduces from 10 years to 6 years now giving you 128M in retirement
Present return of bank shares is 7% growth and 5 % dividend.
Do your own research.
Of course if you smoke only 1 pack per week you have to reduce all figures by 1/7 giving you still a potential wealth in retirement of $9M
I am too old now to take full advantage of compound interest but we have seen that under a Pension Loan Scheme one of the options was to set up an investment trust for your grand children.
You can get an advance of $14,257 under this scheme and if you invest that for them at the birth of a grandchild.
They will then have:
$ 28,514 When 10 years old
$ 57,028 When 20 years old
$114,056 When 30 years old
Enough for a deposit on a house.
Of course if you have 3 grand children they will only get $38,019 which may still be enough for a deposit on a house