Wednesday, November 24, 2021

Save, Inherit, and Invest

I love reading the Millionaire Interviews at the Earn, Save, and Invest Blog. One of the questions they get asked is "What would you say is your greatest strength in the ESI wealth-building model (Earn, Save or Invest) and why would you say it’s tops?" Compared to many of his interviewees, our earning has not been that strong. Despite my salary putting me in the top 5% of Australian earners, it's only nominally about USD 125k per year. On the other hand, our household income including superannuation contributions and net investment income is nearer USD 250k per year. Historically, I would have said that our strength was in saving. Before we bought the house and had children, we had a very high saving rate. But, in the last few years, our investment profits have really taken off. Now the sources of our net worth are roughly 25% saving, 30% inheritance, and 45% investment returns.

I've posted earlier versions of this crazy chart before:

It separates net worth into saving and investment returns in superannuation and non-superannuation accounts, inheritance, and housing equity. Part of housing equity is saving and part gains. Maybe, in the future I will split that up in the graph. Only recently is that difference becoming significant.

Up till the end of 2014, we saved a lot apart from the meltdown following the crash. Since then we moved savings into housing equity and superannuation, resulting in negative current savings. More interesting is that after the first transfer to housing equity the growth rate of savings (i.e. the slope in the segments without a transfer) is much lower than before 2015. On the other hand, retirement contributions remain strong.

P.S. 25 November

So, I made a chart showing just total savings, inherited money, and investment returns:

Investment returns are the gap between net worth and the other two categories. As investment returns went negative a few times, plotting them in the same way as the other two sources would be confusing. This graph shows that savings continue to increase but at a slower pace than they did in the first part of the previous decade.

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