To end our series, we thought some worked examples would be helpful. In this post we cover house savings, next post we cover retirement planning.
Example 1: Saving for a home
|Starting Investment amount||$5,000|
|Target Investment amount||$200,000 in today’s dollars|
|Cash needs over next 3 years||$0|
|Investment Time Horizon||10 years|
|Investment Purpose||First Home|
Peter is 25 and has $5,000 in savings. By the time he is 35, he would like to buy his own home, either to live in, or as an investment. He thinks a deposit of $200,000 in today’s dollars will be enough for a 20% deposit on his chosen property.
He will not need to access any cash from the savings in this account in the next few years. Peter is a risk taker and is comfortable taking on the risk of losing money every 4-5 years, because he really wants to maximise his return.
Peter decides to invest his money in 80% growth assets, and 20% in defensive assets and selects:
|Asset Class||Percent||Amount||Estimated Return|
|Estimated Weighted Return||7.125% p.a.
To estimate return, Peter uses a lower rate of return than historical rate of returns, due to the current low interest rate environment. He will revise his estimated returns by asset class each year, based on current economic conditions.
Calculating Target Investment Amounts
In 10 years time, Peter estimates that $200,000 in today’s dollars will be equivalent to $256,000, using an inflation rate of 2.50%. Therefore the target at the end of 10 years is $256,000.
If his investments earn 7.125% p.a, peter will need to save $1,400 per month to reach his goal at the end of 10 years.
Given his small starting investment amount, and relatively small monthly contributions, Peter decides to invest using exchange-traded funds. He invests in:
5% Cash in a high interest savings account
5% Government Bond Fund ETF (very low risk)
10% Corporate Bond Fund ETF (medium risk)
40% ASX 200 ETF (high risk)
40% International Stock market ETF (highest risk)
Peter will monitor the performance of his portfolio via his brokerage account, and intends to check the performance monthly and rebalance his portfolio allocation annually.
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