I adhere in the philosophy of spending defensively while investing aggressively to achieve your goals of financial independence. This is especially true if you are a young and unattached individual.
What does this mean?
This means reducing your monthly budget as much as you can sanely handle while increasing your portfolio risk as much as you can sanely handle.
Ok…what does that really mean?
Ok. Let’s use some concrete numbers. According to Stats Canada, the average wage for a Canadian employee is about $49,000. The average savings rate is about 10% or $4900.
Now, the Average Joe young adult today is quite risk adverse. This is completely understandable since 2 major stock crashes came and left. We’ve witnessed million dollar portfolios shrivel to nothing. It is completely understandable for the average young adult to distrust the market. Anyhow, let’s generously assume Average Joe’s conservative portfolio is 50% equities and 50% bonds. If stocks were to return an average of 8% and bonds 3%, our total expected gain is 5.5%.
Assuming Average Joe starts his/her career at age 25, and plugging in those numbers, how much should he/she expect to accumulated by 60?
Ok that’s not bad, but what if you are able to be a little bit more frugal in terms of spending and a little more aggressive in terms of investing? Let’s assume Defensive Spender/Aggressive Investor (DSAI) is able to save $10,000 per year and you understand to risks of stocks and are devoted to long term 100% equities investment. How much would you have accumulated by then?
|Defensive Spender/Aggressive Investor|
Wow, with just 2x the effort and a little bit more risk, after 40 years of compound investing, you would have gained nearly 4x the networth!
How does this compare to average Canadians? According to HRSDC.GC.CA, I have constructed a table of median networth by age:
|Median Networth by Age in Canada (2005)|
Notice how eerily Average Joe’s net-worth resembles the table given by official stats? However, if you followed the SD/IA philosophy, you would have blown both out of the water!