Investing just $10 a day could make you $1.8 million

There’s a simple way to make the average Aussie salary of $92,000 a year without working – but there’s a reason not many people manage to do it.

We all know investing is important. We know compound interest can help build wealth. And we know procrastination isn’t helpful.

But there’s a difference between knowing something and actually doing something about it.

To me, true money success means replacing your (current or ideal) salary with investment income.

How to replace your income with investments

In Australia the average salary is $92,029 as of May 2022. The rough rule of thumb to calculate how much you’d need in investments to replace this salary is that you multiply this amount by 20 (or divide by 5 per cent) to get to $1,840,592.

Five per cent is based on the 30 year return of the Australian share market of 9.8 per cent, assuming an allowance for fees and taxes of 2.3 per cent, and then allowing an allowance for long term inflation of 2.5 per cent, leaving you with a total return of 5 per cent you can spend as an income.

It gets a little technical (and it’s worth calling out that this is an approximation), but basically because we’re allowing for taxes and fees as well as inflation, it means that if you had an investment portfolio of $1,840,592 today it would deliver you an income around $92,029 in the next 12 months. Then this income would be indexed to inflation so you’d receive the same income in real dollars every year forever without eating into your original capital.

Investing $10 a day could eventually see you with an investment if $1.8 million. Picture: iStock.

If you were starting with $0 in your investment account today, at age 20 if you were to save and invest $10.10 daily, then reinvest all income (dividends on your shares) over time, by the time you reach age 60 you’d have built total investments of $1,840,592.

If you start investing at age 30, you’d need to increase your daily investment to $27.72 to reach the same point. If you wait until age 40, your daily investment would need to increase to $81.11. And if you wait until age 50, you’d need to make a daily investment of a whopping $296.38 to reach the same end goal of $1,840,592.

This shows the power of getting time, but it also shows the power of getting started.

See here’s the thing. Most people think about investing, they know they should invest, but when it comes time to do the doing they stall. It’s easy to put this off for a tomorrow that never seems to come around.

If you fall into the inaction trap, you’re missing out on the opportunity to start seriously building your money momentum. And ultimately, you’ll just be forced to play catch up later on, saving and sacrificing more to get to the same result.

Steps to nail your investing:

Understand compounding

The power of time and money is a magical thing. You don’t need a lot to get started, and the power of consistent compounding over time creates serious results.

Many people talk about compounding, and I think most people understand that it’s “a thing” – but knowing it and seeing it are two very different things. You can use a simple compounding calculator like the ASIC’s Moneysmart version to see what compounding could actually deliver for you.

Fire up the calculator and use the 30-year return on the Australian share market of 9.8 per cent, then look at how your investments could grow over time if you contribute at different rates every week. I guarantee you’ll be surprised by the power of compounding and this will boost your motivation to invest more.

Investing in the Australian share market over 30 years could pay off.

Set targets

Once you know what’s realistically possible from your investments it’s time to set some clear targets. Knowing what you’re aiming for and setting your expectations around when it will happen should give you a lot of confidence in what you’re doing with your money. It will also give you more motivation to follow your plans through to get the results you want.

If you’re new to targets or early on in your money journey, I suggest making your first couple of targets small and not too far away – this will mean you have some milestones to celebrate the progress you’ve made.

Set your investment strategy

Once you know that you want to invest and what you’re working towards, you need to figure out what you’re actually going to invest into. The main choice here is whether you want to invest actively or passively, and the right choice will have a big impact on your results over time.

The statistics show the passive index investments perform better 95 per cent of the time, so this can be a good starting point you should have the confidence to get started with.

Keep in mind also that the strategy you choose today isn’t necessarily the one you’re going to have to follow forever, so getting started is going to be more powerful than getting it perfect.

Once you get started investing you’ll start learning more, and can use that knowledge to refine your approach over time.

Choose your platform

There are a lot of options out there about where you should actually invest your money, such as ETFs through an online broker, micro investing, shares, or managed funds.

While each of these different types of investments and platforms have differences between them, the actual impact is pretty small. The costs are broadly similar across the options. The access to investments is pretty similar. And the tax consequences are fairly similar.

This might be a little controversial for my buddies in personal finance, but what this really means for you is that it doesn’t actually make that much difference whether you choose to use an ETF, managed fund, or micro investing platform – particularly in the early days of your wealth building.

So if there isn’t a significant difference between the options, instead of spending a heap of time and focus on figuring out which platform is best for your investing returns, instead you can focus on which type of investment is aligned with your investing strategy, on that gives you access to the style of investments you want, and an account that’s easy to open, easy to use, and easy to automate your regular investments.

In my view if you’re new to investing, micro investing is probably the easiest place to start. These platforms have a slick user experience, and you can set up an account on your smartphone and start investing immediately.

If you get stuck at this stage, seek out some good professional advice to help you get started – this will pay for itself many times over.

Get started

Once you’ve followed the steps above, it’s time to turn your ideas into outcomes and start investing. If you’re nervous, you can start small – but the key is actually getting started.

Investing is a skill, a behaviour, a habit, and a muscle that you build over time. The sooner you get started, the sooner you start flexing the muscle and building your knowledge and confidence around investing.

The wrap

Investing is the key to not being forced to work forever, and it’s a crucial part of money success. Compounding can create some powerful results and outcomes.

But compounding either works for you, or against you. The longer it takes you to get started and start leveraging the power of compounding, the further behind you can fall. But on the flip side, get compounding working for you and you immediately start building momentum you can leverage to make your next steps easier.

Ben Nash is a finance expert commentator, podcaster, financial advisor and founder of Pivot Wealth, the host of the How to be Successful with Money podcast, and Author of the Amazon Best Selling Book ‘Get Unstuck’

Ben has just launched a series of free online money education events to help you get on the front financial foot. You can check out all the details and book your place here.

Disclaimer: The information contained in this article is general in nature and does not take into account your personal objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your circumstances before acting on it, and where appropriate, seek professional advice from a finance professional.