By Al Lewison
Have you ever heard of the butterfly effect? I’m not talking about that excellent movie featuring Ashton Kutcher, but a scientific paper, written in 1967. The paper posed the question: Does the flap of a butterfly’s wing in Brazil, create a tornado in Texas? The idea being that a really small action can create a huge result.
Now, you are probably wondering why I am talking about such a deep concept. My point is, people can do something small today, that they will thank themselves for, or their kids will thank them for, in ten years.
So 20 years ago, I flapped my butterfly wings and invested $20,000 on a house deposit. I was working a nightshift job filling shelves at Safeway and my choices were: go overseas with friends, drive a nicer car or invest. I chose to invest and this decision led me on a year long journey during which time, I came to understand capital growth, equity and other people’s money.
I duplicated, invested again and continue doing so. All of this began with one difficult decision. Choosing to invest meant sacrifices and sleepless nights but I am so happy I took the plunge. The small domino was my $20,000 investment and nowadays, without big noting, Cam and I have over $500 million worth of property developments underway around Australia; so the decision paid off to a degree I could never had imagined.
We have talked about Warren Buffet in the past. He’s been investing since he was in his mid twenties and getting returns of about 30 per cent annual growth, year on year. This compounding growth meant that 99 per cent of his wealth was achieved after the age of 50.
Similarly, returns from the small investments Cam and I chose to make early on have compounded over time. We didn’t go out and buy 30 properties a year at the start. It was one, then a couple, then four, ten and so on. Each year our returns meant we had larger amounts of money available for purchasing.
You can compare those who live off the money they earn and investors by thinking about a money stream. Let’s say money flows down the stream and the people earning a living go to the water and scoop out some money to take back to their family. On the other hand, investors dig a channel, so that the money flows directly to them. In our case, these channels are growth properties with positive cash flow.
The only problem you really have when you get to this stage of compounding growth is learning how to invest fast enough to make sure you’re duplicating year on year. There are definitely worse problems to have. So take action and do something today, you will thank yourself for in ten years. Another way of looking at it is: if you don’t – what will you be saying to yourself in a decade’s time?
Parents, I know you want your kids to learn about the value of a dollar – money for time spent but to be brutally honest, I think it is nearly impossible for kids to save a deposit these days. The reality is that by the time they have saved through ten years, property values are going to have doubled and investing will still be out of their reach.
Obviously parents need to make the decision to assist their kids, depending on their circumstances and whether their kid has shown that they are sensible enough to make sacrifices, work hard and not blow the lot.
I think redrawing $50,000, or $70,000 from the family home or an investment property to help kids begin their property investing journey is one of the best things a parent can do. In order to afford this however, parents will need equity behind them. So it pays to take the first step as early as possible; ideally, when the kids are young or before you have them, when you can afford it!
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