Meet Sarah and Louise. They are two hypothetical sisters who each received an inheritance of $100,000 back in 2007.
Sarah chose the so-called safe road of saving her money, but Louise took a risk and purchased some investment properties.
How did they compare come 2017?
Sarah the saver.
Sarah put her money into an online savings account. She earned 2% interest each year – the average amount available at the moment.
Over the course of ten years she turned $100,000 into $120,000.
It didn’t even help her keep up with inflation.
During this time her rent doubled. So did the cost of food and many other goods and services. Her utility bills also went up.
Saving caused her to lose wealth.
Louise the leveraged one.
Louise used her $100,000 to buy two investment properties in Western Sydney.
Each property was worth $250,000, but she picked them up for $200,000 each.
She used an 80% lend to buy them, so her loan size was $320,000 in total.
The deposit consisted of $40,000 plus $10,000 closing costs for each property – $100,000 in total.
Ten years later, in 2017, the properties were worth $400,000 to $500,000 each.
The total worth was $800,000 to $1 million. $800,000 minus the loan size of $320,000 is $480,000.
Louise made half a million dollars in ten years.
It is clear to see who is the winner and who is the loser in this scenario.
Rates can’t go up.
We are entering into a new economic phase. Rates can’t go up without damaging the economy. It is likely they will stay down for some time; causing high inflation and affecting the savings of countless people.
In this environment, the savers are truly the losers. Those who buy assets that are subject to inflation, such as property, will be the winners of the new age.
Have you watched your savings dwindle in value while property in your street has doubled? Please share your thoughts in the comments section below.