Hi and welcome to this week's episode of Money with Alpha. Something I've tried very much to do and that I'm extremely passionate about is self-empowerment when it comes to money. I was having a conversation with somebody just earlier today talking about how, you know, when things that happen in life that we don't always choose, some unexpected stuff comes up, you know, job changes that you didn't see coming or relationship changes that you might not have initially planned for or saw coming. And ultimately it's about having that level of confidence in yourself and the self-empowerment to be able to do stuff when it comes to money. And to me, I'm very much knowledge is power. I grew up very much in a family where the idea of education and knowing things was how you overcame obstacles and problems, and it's what got you ahead. Like, I, my, my father's side of the family, you know, they grew up, they didn't, you know, they say, I think he made it to maybe grade 9, and education wasn't as easily available, plus money wasn't very readily available. So all of the kids— he was the youngest of 5— all of the children had to work. And this is in, you know, what's essentially a Second World country in, you know, what's now called Northern Macedonia. And he was born back in the early 1940s, so a lot of turmoil. So he didn't have that kind of education opportunities like I did. And in his case, he didn't sort of see that value necessarily until a bit later in life. Was on my mother's side, also kind of not overly educated. My grandmother was born in Vienna in 1920. She didn't have the opportunity to do much schooling either. But when she came to Australia and my mum was about 7 by that stage, it was very much, you know, you get educated, that's the path to success, you know. So in my case, that looked like university. That was the path that was laid out for me. It was like the only option that I was told that I had. And at the time, you know, you don't really know any better and I didn't really know what I wanted to do. So I did the university path. But the concept of if you don't know something, you become educated, you figure it out and you do it, that part was really drummed into me. So to me, that concept of knowledge is power was part of my upbringing. And I very much believe in that still. It doesn't necessarily have to look like university, however it can. There's so many other options, especially these days. But being able to understand something enough— like, it's not like you need to, like, do a complete university degree to understand money, because, hey, that doesn't exist anyway. Or even doing sort of like a full— like, studying financial planning, which is what I did, because there was no other way to— what I thought— to learn about money. And that got me a certain part of the way, but there were still other things I had to supplement with. And sometimes you do have to have a little bit of trial and error, and you do have to take some risks, for want of a better word. And that's not to say that you go and chuck everything into crypto or it's not like going to the casino, that kind of risks. But you do have to sort of take some action and then balance it out with what you sort of feel comfortable with. But sometimes it's just fundamental knowledge that we are just not given. So in today's episode, I wanted to actually take you through because I've been, I've been working on my loan calculator that I've got inside my Prosperous app, and I've got it to a point where I find it really exciting because it gives you a little bit more information. To be able to work with. I often talk about the concept of compounding, which is like the technical term. Essentially, it's money making money. So it's money upon money upon money. And that works in two different directions. It can either work for you, as in earning money on money. So when you invest money and you invest it in, say, an ETF or a share, and it makes money, and then— so you started with, say, $100 it earned $10. So now the amount you are— you have is $110, and it earns money on that rather than it just being on the $100. So it's money earning money on money. And sometimes that can feel a bit invisible because it's not linear. And if you've got money in a, like a term deposit even, or even just in a high interest bank account, you can kind of see it. It is a bit more linear, but over time we underestimate, I think, the power of that compounding. So I wanted to show you today. So if you're only listening, I will talk out the numbers. But if you happen to be watching, or if you'd like to watch, I do have it on YouTube. Because I've got my pretty pink graph that I'm going to be showing, which is the color inside the Prosperous app to actually give you that visual. So, and then I'm also going to show you the sort of the flip side in terms of like how to, you know, compound with the debt side of it too. So interest, so money, you know, can earn money upon money upon money, but it can also pay money upon money upon money. So it's, it's a matter of understanding, you know, the, the, I guess the priority of debt and that's usually. Anything that's like a higher interest rate, try and get that paid off as quickly as possible, especially if it's not on a, on something that's going to grow in value. So having debt on property that will grow in value, even shares to a certain extent as well, although the, the loan-to-value ratio there is usually lower. Like you can, when I say that, you can borrow, say the, the property, you can borrow probably around, Chip, historically it's about 80% there are new schemes around where you can borrow 95%. That doesn't give you a huge amount of wiggle room. But anyway, I'm not going to, I'm not going to weigh in on that in my, my own personal opinion on that one. But when you sort of take your borrowing or using debt as leverage to buy things like shares, usually it's only about 30% instead of 80%. So whatever it is, the debt can compound on itself as well as the money that you're either earning or the investment that's growing. So I'm going to switch to sharing my screen. As most people these days, I have multiple tabs open, so I've got the right one though. So here I'm just going to go into the debt side of things first, and I've got a bit of a test one here, mainly because I actually don't have any debt at the moment, so I have to do it on a made-up amount here. So I've tried to pick sort of an average loan balance or something that's pretty sort of flat. So I've got here a $500,000. Current interest rates usually run at around the sort of 6% mark, although they just went up again. So what this is doing is allowing you to see the impact of different things that you can do to sort of demonstrate the change. So monthly payment, say $3,500. And what I've got here at the moment is also showing if you put an extra $100. So on a $500,000 loan balance, with interest at 6% and a monthly repayment of $3,500. If— I'm just going to go back here— if you didn't put anything extra on there, we're looking at 25, 21 years to pay it off. I'm just looking at the, the little chart here. It's showing me after 20, 21 years, it'll get paid off. If you add in an extra $100 a month, you save 1 year and 2 months and $23,000 in interest. And you pay it off then in 19— where are we here? It's just under 20 years. So, and it's not just the time. So it's in 1 year might not sound like a whole lot, but the amount of interest, $23,000, like that's still pretty substantial. And that's just paying an extra $100 off a month. So that's, and then say for instance, you get your tax return and you get maybe $1,000. So I'll chuck that on here as well. So if you end up having $1,000 that you just chuck on as a, as a, just a one-off lump sum, then that's going to take, it only takes a month off, but it takes 20, it's now an extra $2,000. So just every little bit helps ideally over time because money compounding over time is actually where there's a lot of value. So let's just have a look. There was— I had a client recently who was looking at— they wanted to try and pay off their loan. It was going to take 22 years to do it. But by putting an extra— I think it was $500 in their case, and this was a different loan situation, so it's not going to have the same sort of level of impact. But if I put $500— and I'm going to take that lump sum off again— just $500 a month, that takes 4 years and 7 months. Off the loan. So it's now paid off in just over 16 years instead of 21, and $92,500 saved in interest. I mean, that's, that's a lot of money, and that's just putting an extra $500 on a month. And then, and this one, this one will depend, and then there's, there's an interest rate comparison here, so you can sort of see when I open this out here what it would look like if your interest rate goes up or down. So that way you can start to sort of see the flexing before things change. And then also, you know, if you want to go down the path of refinancing, it sort of gives you a bit of a view of how much you're going to save potentially by refinancing to a lower interest rate. So even if I just go back, I'm just going to put that one back up again. Even if I just change the interest rate here to say 5.9%, Something has changed here. Oh, I have to go back into the loan to change the interest rate. I'll leave it at 6% for now, just for the sake of ease. But the other thing I'm going to show you here now is the difference if you don't have an offset account and you have a redraw. And if you don't understand what those two terms mean, I'll briefly explain them, but you really need to understand this. And I would really hope that when you got your loan, that whoever set it up explained this to you. And if you don't, then that That's— I'm not even going to go down that, how that part, that, that just— yeah, it hurts me. Not like personally, but it just, it annoys me when stuff like that happens because when you sign up for something this big, you should understand at least the key terms. So an offset account is where you've got sort of an account sitting off to the side of your loan. You're putting all your pay goes in there and that offsets the balance. So say for instance your loan balance is $500,000 but you have say $20,000 sitting in there because, you know, over the last few months you've been paid and you've, you know, haven't used all of the money and it sits there and that— so your loan is actually $480,000. So it sits off to the side and offsets the loan. So if you have one of those, the thing I'm about to show you is not actually going to help you because you've already got sort of that balance reduction going on. But if you have— you don't have an offset account and you have a redraw, and quite often the offset accounts do actually come with a slightly higher interest rate because of the benefit of the offset, of the, you know, the like offsetting the amount of interest. So if you are not likely to ever have any extra in there, an offset account and paying an extra interest, that's something I would really chat to your mortgage broker about. My husband and I, when we got our home loan you know, whenever it was a few years back, I can't remember now, about 8 or 9 years ago, we chose not to go offset. We wanted the lowest interest rate because we knew our ability to pay it off was higher than the benefit we would have gotten from an offset account. So we actually chose to go down the path of the redraw and a lower interest rate. So if you are, if you do have a redraw rather than an offset, then I'll show you something else here. If you didn't already know, paying it off fortnightly, and I've got my little apply the fortnightly amount here. Check that out. We've got another 2 years. So we've gone from— let me just go back to this. So we've gone from paying it off. So we're up, we're on the $500 a month extra. I might just go back to $100 because that might feel a bit more realistic right now. Hopefully even $100 is realistic. So we've saved 1 year and 2 months just by putting an extra $100 onto the loan. But if you pay it off fortnightly, so the exact same amount every month. So instead of the $3,000, what are we up to? $3,600 a month, you're now down to, what was it, $1,800 a month. Sorry, a fortnight. So it's still the same amount, but you're just paying it fortnightly. So you're not even paying any extra. That reduces it to 4 years saved. So I'm just going to read, like, goes from 1 year, 2 months to 4 years just by paying the same amount, but fortnightly. And the interest goes from $23,000, saving $23,300 or so to $80,000. Like that's phenomenal for not even changing your behavior just by doing fortnightly. So it's— I just, sorry, that the importance of this is astronomical. And to be honest, you're not going to get this level of insight from a bank because they want that extra $80,000 because that goes— feeds into their shareholder value and all their bonuses that their executives get and all of that kind of thing. So they're not going to show you this kind of calculator. Which is why I wanted it to be there so you could play around with it and go, okay, if I could do this, if I can find maybe an extra $50. So I'm just gonna go back to the, the no fortnightly repayments, but that is that, that one is like the simplest. So even if, even if I'm just gonna take off the extra $100 a month, even if you just do the fortnightly repayments, you're still saving 3 years and $62,000. Like, it's— oh my goodness. It's just a slight change in behavior. All you've got to do is just make sure that those loan payments happen every fortnight instead of every month. And sometimes it can be a bit of an adjustment from your cash flow perspective, but it is so worth it. So I'll just turn the fortnightly one back off again. I'm going to assume that you might have an offset account. So even if you go, oh, I'm going to try and find $200 a month now. Well, that's 2 years and 40, almost $44,000 taken off. So it's, it's really, really important to, to have a play with this sort of thing, which is the reason why I built this into the Prosperous app, because I wanted you to be able to have this information at your fingertips so you could play around and go, is it worth it? Is it worth us trying to find an extra $200 a month or an extra $100 a month or paying fortnightly? Like, 'Cause if you don't know this sort of thing, you're not gonna like do it, but you, and you don't know that you could actually save yourself a lot of time and money. So these, these clients, I haven't got all of their loan details in here, but their situation was like phenomenal. It was, they went from paying $1,000 a month and paying off the loan in 22 years. If the, with the $500 extra on there, reducing that to 11 years. And I think then we looked at, fortnightly repayments. That's right. And that reduced it by another almost 3 years. So they went down from 22 years to just over 8 years, which is just mind-boggling. And they had a goal of wanting to retire in 7 years' time. So clearly, in 22 years, with— if they kept on the same trajectory they were on, they wouldn't have been able to retire in 7 years, whereas now they might be able to retire in like 8 and a bit years. But it is so much closer than the 22 years, clearly. And all of that interest that they've saved. So it is incredibly important to understand how this works. So this is just from the, the, the compounding impact of paying off debt. So now I'm going to go into the Future Projector, also in the Prosperous app. And so I've just, if you're following along on the video, you'll see it. But if you're not, I've just, there's another little like tab that I've got here and you can enter in all of your assets and your liabilities. So any liabilities is basically loans, assets is anything that you own, like like your superannuation, your home, any shares you might have, if you have an investment property, that all goes in there. Then in the future projector, you can— I've got it here so you can adjust for inflation, you can apply a tax rate reduction as well so that you can actually get to see the amounts that you keep. So it's not just, oh, I could make, I could make 15% per annum, which is pretty up there at the moment in particular, it's possible. But not every year, I'm going to say, for the average investment. So we've got some adjustments here so that you get a bit more of a realistic view. But if I scroll down a bit, you get to see your actual sort of setup. And I've got some figures in here already, but you can start to see, like, for instance, I'm going to go into one of them here and make some adjustments. You can update the amount that you pay. So the interest rate or the, you know, say, for instance, your superannuation balance. And you wanna say, okay, I'm gonna say, oh, I could make about 6% per year. Or I might have a savings account and I could up that at the moment because our savings accounts are going up. These figures aren't all accurate by the way. So it's just, so you could say, I'm gonna, it's gonna go to 5%. So I can have a look now, the difference between like 4.5% in, you know, 10 years' time on a balance. Let me see, actually, I might try something. Oh, that's the debt one. I'm trying to find— actually, you know what, I'm just going to add in a new one. Just might make that a little bit easier. So I'm just going to add in a new savings account. I'm just going to put in here as test, current value 0. I'm not going to link it to a MoneyPie thing at the moment. So I'm just going to add that in. Then I'm going to go into the Future Projector and find this test one that I just created. So there's nothing in it at the moment on that line item there. I'm going to say it's going to be returning, say, a 5% return, and then I'm going to put in a monthly contribution. I'll say, oh, you know, I could probably put in $50 a month, so let's put in $50. Okay, so I can see now in— I'll just scroll up so you can see that. Yeah, I don't know if the headings— okay, so this first one is 5 years. In 5 years, you'd have about $3,000, and this is adjusted for inflation and tax. Otherwise it would be $3,400. So but in 10 years it's again adjusted for all those things, $5,777. By the time you get to 20 years, that fit— just $50 a month is almost $11,000. You'd be like, oh, okay, this is starting to become a bit more interesting. I'm now a bit more I'm going to try and find that $50 because I now can see what that compounding can do for me. So, and it's, I've got here, it's $19,000, not adjusted for inflation or anything. So inflation can change and your tax rate might change as well. So I'll give you the full amount. So it could be up to $19,000. Let's just say you're investing it into just a balanced ETF. So an index exchange traded fund, which you could realistically expect possibly 8%. So this now goes up to $28,000 over 20 years in 5 to 10. So for anyone who says to me, oh, I'm in my, in my, you know, I'm in my late 40s or early 50s, I, you know, it's too late for me. And I was like, no, it's not. If you're going to live into your 70s and 80s, which let's face it, statistically a lot of women do, like when you, when they look at all of the actuarial data in terms of life expectancy and they're factoring in sort of all the insurance policies and all of that, the average lifespan for a woman at the moment is like 87 and a half. Men, it's like 85. So if you think that, you know, on average you might live into at least your mid-80s, you've got at least another 30 years to be able to do something. So it is absolutely not too late. And don't forget, you've also got your superannuation ticking away on the side there, and there's other things you can do as well. So you've got time to still be able to do something. And if I look here, in 20 years this is $28. If you increase this, and I'm going to stick to the 8%, I could do 10, but I'm going to be conservative because, well, I'm a little bit more— I err on the side of caution when it comes to this sort of thing. So I don't want to give you like inflated ideas. So let's just say we up that to $100, then suddenly it's $56,000 in 20 years. So it just— it's really, really important to understand that every little dollar counts and it's compounding on itself year on year. So if you do nothing, it's going to stay at zero. But doing something is— so having like possibly $56,000 just from $100 a month going into into an ETF. You don't even have to— you can set it automatically. I have an automatic transfer that goes into my Vanguard account every month, and I've told it which 3 ETFs I want it to go to. The only thing I have to do is make sure that that money is sitting in there when the, when the automatic thing comes out, because I'm always transferring my money. And I— the first time I did it The first month I set it up, I forgot, and I get this like, oh, payment bounce. I was like oopsie, that's right, I forgot I transferred too much into my other accounts. So I just had to transfer some of it back. But then once I got into the rhythm of it, then I'm like, okay, I just need to make sure that I don't transfer too much out of that account because that's the one that the automatic transfer comes out of. Or you can just do it manually. My experience though was doing it manually It just doesn't happen. So automatic transfers are really good from a— you don't even have to think about it. Doesn't even require discipline anymore. It just is an automatic thing that happens and you get used to not having that money and not used to having that cash flow because that money is now growing. It's working for you in the future. So if even you can get to the point where you up this to say $150, so $150 a month put aside over at an 8% return. Over 20 years, you get nearly $85,000. Like, that is worth doing something for. So it's really, really important to actually get to the point where you're doing this. And this is starting from zero. So it can be a completely new habit to start, but it's an important one. So that is the power of compounding. I'm just going to stop sharing my screen here. So I'll just go back to pure audio as well. It's really, really important to be knowledgeable enough in this to be able to take the right actions so that you can pay off the debt that you want to pay off sooner. Because the thing is, then even if you wanted to get an investment property, if you can pay off enough equity in your home, then you can use some of that equity to get an investment property. So it allows you to have choices and to build rather than survive. So it's about thriving. So that helps you from both the debt side and the growth side. And then in parallel to that, you can automate putting some money into either adding into your super fund if you don't already, to get up to your— in Australia we have up to $30,000. I think that figure's about to increase again. As from a tax concessions perspective, so that you're only paying a maximum of 15%, which is great. So if you can maximize your super, excellent. But I always suggest having some money outside of super as well invested. But this also comes down to if you're not— I hesitate to use the word disciplined enough, but if you want to make sure that that money is not accessible and that you are actually putting it in towards your future, put it into your super fund. Because if you have it outside of super, sometimes it can be a bit too tempting to pay for life's extra things that you want, whether it's emergencies or whatever it happens to be. If it's in your super, it's there for your future. But if you do have the ability to put something into an investment outside of super and not touch it, then I'd suggest doing that as well because you can see how it compounds over time. It just— the power of compounding is exciting. So when interest rates go up, as they just did again yesterday in Australia, then you'll feel it on that side, but you're also covering yourself on the upside. So it's not just about the downside of paying more in interest. Your money can actually earn more on the other side as well. So you're becoming an investor who can take both sides of that compounding equation. So it's just, it's a lot more empowering when you can go, okay, don't like that the interest rate's gone up, but I know I'm being covered on this side now as well. So I'm earning more on this money while I'm also paying more on this side. So maybe the two can kind of balance each other out a little bit. It might not completely balance it out, but it can help at least, which is helping, you know, solve that problem of for cost of living too. So that was, that was quite a technical one, but it's something I'm very passionate about and I think it's extremely important and it's not emphasized enough. We don't get taught about compound— we get taught about the concept of compounding, I think, in school to a certain extent, but not how it impacts us on a day-to-day basis in our lives. Which is really, really important. And that's why I like the visual calculator that I showed you so that you can see what difference it makes. Just small tweaks in, in your day-to-day living and how you're paying things off and where you're prioritizing putting your money as well. So it might be worthwhile to, to put off a holiday or a new TV or whatever it is for just a bit longer so that you can afford to pay that extra on your home loan while saving up for those other things as well. So, and that's where the power of the money pie comes in, but that's not the point of this episode. This one is about, you know, the self-empowered knowledge and the power of compounding. So hopefully that has made sense. If not, please reach out. But I hope that's helped you as well to start looking. If you want to have a play with it, there's a 21-day free trial for the Prosperous app, and you can start to put your details in there even if you don't necessarily want to use the budgeting side of it or the day-to-day cash flow view, which automatically pulls in your bank account details and categorizes them. Even if you just use it for that, it's incredibly powerful. So obviously I'm a fan, I built it and I use it, like I'm using it myself on a very regular basis and helping me make decisions and running scenarios of like, if I do this or if I do this, what will that do? Which is quite fun. I mean, that's what I created it for, so that you can have a bit of a sandpit or sandbox as well as have the real side alongside it so you can take the right actions and be more informed. So I'll leave you there for this episode. I've got some exciting guests coming up in the next few months as well, so stay tuned for those. Very much in relation to building knowledge and awareness and experiences of others as well. So stay tuned for those. All right, have a wonderful week and I'll catch you in the next episode.
