What should I do with my money other than leave it in the bank?

In an age where the most preferred place to leave our savings is a bank deposit that rewards us with such a ridiculously low rate of interest of 1 per cent (if you’re very lucky), what should a wise wealth builder do?

My ‘advice’ is: to wise up!

In the latest Westpac-Melbourne Institute Index of Consumer Sentiment survey, 28.7 per cent of respondents said the ‘wisest place for savings’ was ‘in the bank’.

But while the bank was most favoured as a destination for savings, 12.1 per cent of consumers now regard the share market as the ‘wisest’ place for savings. This is the highest reading in a decade!

So are these lovers of the stock market wise, or simply judicious?

To answer this question, we have to work out what wise actually means. If wise means safe, then those 28.7 per cent of Aussies who think the bank is the best place for their money are on the money.

Up to $250,000 of a bank deposit is government guaranteed. Nothing compares to this for retail customers other than government bonds, which are harder to access than a good old bank account.

But if a wise place for your savings means some vehicle where you can grow your wealth, then forget it.

A great long-term performing industry super fund is a really wise place to grow your wealth. Because you have to leave your money there until you retire, it’s a pretty safe place to leave your money. Sure, the value will go up and down with the screwy movements of the stock market, but it will be on a rising trend.

Looking at good super funds returning a long-term average of 7 per cent means if you put in $10,000 today, I’d bet by 2031 it would be around $20,000.

By 2041, it would be $40,000, by 2051 $80,000 and by 2061, I guess about $160,000.

How do I know this? Well, if you average 7 per cent a year then your money doubles every 10 years.

Why? The mathematicians call it the Rule of 72, where you divide 72 by 7 per cent and get around 10. I’m not going to argue with them.

Clearly, super is a wise place for money. But what if you want to grow your savings but still have access to it, say to buy a house?

You can use the First Home Super Saver Scheme, where you can save via extra contributions to your super fund and then you can withdraw it plus the earnings up to $50,000.

A couple could use super to grow a $100,000 deposit. That could help them to buy an asset called a property that over time would grow their wealth.

Another wise place for your savings can be shares, but you have to be judicious about what shares you buy.

If you go for only tech stocks, this could prove unwise, despite the fact I think quality tech stocks will be important for our stock market over coming decades.

History has shown that if you had a good exposure to a portfolio of stocks that were like the S&P/ASX 200 Index, you would’ve gained about 10 per cent a year for most 10-year periods.

That said, you would’ve had to get used to some big ups and downs for two to three years in that 10. And sometimes a decade could even underperform the average decade.

Provided you can sleep at night, if your nest egg of quality shares crashes but then rebounds over time, the stock market can be a wise and judicious place to grow your wealth. However, there’s no government guarantee with a shares portfolio. But it’s hard to grow your wealth in a bank deposit.

If I assumed a 4 per cent plus interest rate on bank deposits, that $10,000 you saved would be $20,000 by 18 years and $40,000 after 36 years and about $50,000 by 2061.

That’s a lot less than what a super fund would give you, namely, $160,000. And being in shares outside of super would even give you more — possibly over $100,000 more, depending how smart you are with your tax plays.

As you can see, doing a bit of work on different ways to build your wealth could be a really wise thing to do.

Article from: au.finance.yahoo.com