What to invest in first in your 20's?

What’s going on guys Its Jordan de Jong here and today I want to talk about my opinion on whether you should travel, purchase a car or buy a property first in your 20’s, people often get asked the question what would you go back and tell your 21-year-old self if you could. There is a mixed bag of results, some say to go travel and experience the world, while others say work hard now to set yourself up financially, although I’ve heard the majority of property investors say, “I wish I started earlier”. But I have recently also heard an investment property advisor say that he would recommend to his hypothetical 25-year-old son to go traveling rather than buying an investment property. That was David Johnston who is an absolute legend by the way and I would highly recommend checking out his podcast, So I guess it’s completely up to that person's interpretation of life and if they deem financial independence or life experiences more valuable. So, what court do I fall under? Both! You can most definitely achieve both by the time you are 25, My wife and I have done both over the last 3.5 years and have even recently purchased our second investment property at the end of all of it. Now we haven’t traveled the whole world, but we have done most of the hot spots over Europe, America, Malaysia, and Indonesia, all up we have spent 4 months overseas, purchased 2 investment properties, a new car and even gotten married over the last 3.5 years. Now this isn’t some Tim Ferris 4-hour workweek hack or 300K a year salary package lifestyle, together we don’t earn anything more than the average Australian income, I’m on the corporate ladder and my wife runs her own business, and without her full attention it often slows down cash flow dramatically. If we can do it, you can too, essentially, it’s all about your mindset, having smart money habits, understanding delayed gratification and leveraging your money to get yourself ahead. The hardest part is always getting started, and it can feel forever away but the younger you start saving money the quicker it comes, I know it seems very cliché to say but making your money work for you rather than you work for your money really does generate wealth much quicker. If you don’t have a job, get one, if you spend more than you earn, stop spending, that’s basically the two easiest guides to getting started, I’m not going to talk about how to save money in this blog, I have a whole other blog dedicated to that. But do start with at least one job, on my relatively new podcast I’ve been talking to property investors in their 20’s and the majority of them have had 2 to 3 jobs to help them save as much as possible, but just get 1 to start with and put in place some good money habits. It’s not about saving a $200 or $1,000 a month, some people earning half a million a year don’t even know where their money goes, it’s all about keeping yourself accountable and sticking to your savings plan consistently over time. The only person responsible for your finances is you, so take control of your money and don’t let it control you if you can only save $100 a month, stay true to that plan and watch it grow over time. I’m not here to tell you that you can’t have an almond latte and smashed avocado every single day.. although that is the name of my podcast, but maybe instead of every single day, turn it into a once a fortnight reward rather than an everyday routine activity. It doesn’t matter if you started mowing the lawn for cash at 13 and now your 18 or got your first job after finishing uni at 23 and now you are 28, it’s never too late to take control of your finances and if you think it is, that’s only an excuse you tell yourself, and all you need to do is change that mindset. So, let’s skip ahead a few years, you’ve slaved away over the last 5 years and been able to save $5,000 a year, which is $100 a week, and in total have $25,000 in the bank, yours faced with many options right now and the unrealistic Instagram posts aren’t helping out. You could buy a brand-new car for $25,000, which you’ll lose $3,500 on every year you own it, you could tack onto your best friends’ trip to Europe because they have got everything planned out but need another person to lock in the travel deals, which you’ll get some great life experience on but have to reset savings for a house deposit. Or you could buy an asset that grows in value over time and use the growth to fund both a holiday, a new car and even potentially depending on how much it grows on a second property. Now don’t zone out, I’m going to throw out some big words that may catch you off guard but I ensure you I’ll go through them individually and explain how they impact you, and how you can use them to get yourself ahead, these include inflation, interest rates, capital growth, leverage, and equity. Have you ever had a conversation with someone in the older generation that goes something like, $8.5 for a large hot chip?? Back in my day, we use to be able to go down to the shops and buy them for 5 cents! No? maybe it's just me then and my grandfather. But anyway, this is what we call inflation, where the price of something significantly increase over time, and it impacts everything from hot chips to Lamborghinis, historically in Australia this has generally increased at around 2-3% per year and all this really means is last years $1 is now only worth 97c. An interest rate is how much you either earn for saving money by putting it in a bank account or how much you pay for borrowing money from the banks, right now, as you may be fully aware, we are in a really lower interest environment, which means you earn less from saving money and pay less for borrowing money. If you do a quick google search you’ll be able to find some savings account posing with a 2% interest rate, so let's say you left $25,000 in a savings account, after one year you would have earnt $500 for doing absolutely nothing and have a total of $25,500 in your account. But if inflation for that year was at 3% it means that yesterdays $25,500 is now only worth $24,757.28, this is why it feels like your always financially drowning because the cost of living is always rising and if you’re not in control of your money it’s easy to get caught gasping for air. This is a hypothetical example of course as these numbers always fluctuate but at best you’ll only just be staying on top of inflation If you want to learn more about the cash rate which impacts these interest rates I’ve talked about it in another blog. What makes this even worse is if you use any type of personal loans such as a credit card or car loan, because not only are you paying interest on the money you borrow, but the money you borrowed is worth less each year due to inflation. Especially if you’re buying an asset that also depreciates in value such as a car as I described before, so at the end of 5 years, not only is your car worth significantly less, but you’ve paid all this interest to the banks along the way and the $5,000 it's now worth doesn’t hold the same value as the $5,000 when you purchased it 5 years ago. But you can’t put a price on the experience you say? I totally agree and this whole YouTube thing was basically born out of an experience and me wanting to give back, I’ll I’m saying is if you can implement delayed gratification, buy the house first and then enjoy the holiday in a year or two you’ll end up in much better financial position. Why? Well, capital growth of course, which is how much value a property increases over time, I hate talking about the Australian Residential Property market as a whole but on average it has increased by 6.8% per year over the last 25 years. So, before when we were talking 2’s and 3’s over inflation and interest rates, we’ve got a much bigger number of 6.8% growth in property, so that means instead of earning 2% in interest on that $25,000 you could earn 6.8% in the value of a property increasing instead. But wait it gets even better when we throw in leverage, what this means is your able to use that $25,000 as a deposit for a $500,000 house, that’s right you can get a 95% LVR loan to leverage your $25,000 deposit to borrow $475,000 and buy a $500,000 house. On a $500,000 house at a 6.8% increase, the value of the property would increase by $34,000 in one year, that’s a 136% return on your $25,000 instead of only 2% for it sitting in a bank account, yeah, take that inflation. This all comes together with that final term equity, which is the difference between the market value of a property to what you currently owe on your mortgage, so the price of the property is now $534,000 and your original mortgage is still $475,000, you have $59,000 worth of equity in that property. If you now refinanced that property on another 95% LVR loan, you could pull out $32,300 of that equity to put in an offset account and use it how you want to, IE buy a new car, go or a holiday or buy a second investment property. Just note that by doing so you are increasing the amount you are borrowing by every cent you take out of the offset account and will be paying interest on the money as you spend it. But home loan packages are now going for as cheap as 2.99% compared to 5% or more for a car or personal loan or 10-20% for spending the money on a credit card. The best part is now that you have the property it should, based on history, repeated that 6.8% of growth again next year, and this is compound growth so instead of increasing by $34,000 it would increase by $36,312, and every year moving forward the growth gets larger and larger. This, of course, is hypothetical scenario based on buying a good quality property that increases in value, properties can actually go down in value so make sure you pick the right property, which I’ve got plenty of other blogs on. Also note that there are additional costs when buying property, such as stamp duty, banking costs, and legal fees, so you may have to reduce how much you borrow based on your deposit amount. But this capital growth is all happening in the background, whilst your still working and saving as much as possible on top of paying off that mortgage. As always, seek your own professional financial, legal & property buying advice for your current situation, these blogs are just my opinion and should never be considered personal financial advice. Until next time, happy house hunting.

Jordan De Jong

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