What can investors learn from the banks?

© Reuters. What can investors learn from the banks?

Over the last 40 years, the financial services industry has boomed, but as with everything, there is always a downside because the outcome over the last 40 years for the average Australian is exactly the opposite. Let me explain...

According to the ABS, Australian household debt grew by 7.3%, up to 31 December 2022 with the average debt per household now sitting at $261,492. Interestingly, while the debt has risen, the disposable income for the average household only rose by 3.7%. Obviously, this is a disaster waiting to happen. The reality is that the financial industry has taught us to rely on ever-increasing levels of debt over the last 40 years to fatten our pockets. As such, the rich get richer, while everybody else…you know the story.

But can we learn from what the banks do and turn this scenario around to help us create more wealth in our lives? Absolutely! As we know, the money we deposit into a bank account is lent out in the form of loans on which we are charged interest for the privilege, which means the banks make money on our money. But what if we can turn this on its head and take the bank's money, so we profit from it?

Let’s assume you borrow $10,000 at 6.9% over five years. While most borrow money to buy depreciating assets, what would be the outcome if you invested this money instead? Based on the 5-year, loan, your repayment would be $11,880, which means you’ll pay $1,880 in interest and fees.

Up until December 2022, the average yearly return over the last five years on the All-Ordinaries Index was 4% while the average dividend yield was also around 4%. This period includes the COVID meltdown that occurred in March 2020, which implies in a normal market the return would actually be higher.

If you had invested the $10,000, then in five years, your portfolio would grow by $2,166. You would’ve also received $2,000 in dividend income. If we subtract the $1,880 in interest and fees that are payable on the loan, you would be $2,286 or 23% better off using the bank's money to make a profit for yourself. If we assume the same growth rate over a further five years, the portfolio value would increase to $14,802 and you would have received another $2,000 in dividend income.

The important point to remember is that it doesn’t pay to put your money in the bank only for them to lend it out in the form of a credit card or loan debt, so they make money from you. Instead, you would be far better off using it to reduce your debt or, better yet, use it positively to make money for yourself.

Dale Gillham is Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also author of the bestselling and award winning book Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in all good book stores and online at www.wealthwithin.com.au

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