How wealthy are you compared to other Aussies?
Mark and Shani run through the numbers that define the wealthiest Australians.
How wealthy are you compared with other Australians and does that number actually tell you how financially well-off you are?
In the latest episode of Investing Compass, Mark and Shani discuss the numbers behind Australian wealth, including net worth, income, debt and savings, and why these traditional measures can miss something important: financial freedom and choice.
They also explore the four measures that can tell you more about how wealthy you actually feel - from discretionary income and emergency savings to your financial obligations and, perhaps most importantly, control over your time.
Have a listen to the episode and see how you stack up.
Read the full article here.
Other insights on wealth:
Future Focus: How much should you have in super at every age? I run through where I want to be at every decade.
Future Focus: Are you wealthy? These are some of the factors that determine if you’re doing well.
Unconventional wisdom: Building wealth after the CGT changes. Higher CGT makes building wealth harder but financial independence is still achievable for thoughtful investors.
You can find the transcript below:
Shani Jayamanne: Welcome to another episode of Investing Compass. Before we begin, a quick note that the information contained in this podcast is general in nature. It does not take into consideration your personal situation, circumstances, or needs.
Mark LaMonica: Shani, our one-year book anniversary is coming up, which I think is exciting, and we want to do an episode on it. And what we want to do is we want to answer reader questions. So if anyone has a question that read the book.
Jayamanne: Preferably about investing.
LaMonica: Yes. We probably won’t put the personal questions into the episode. If you have a question, send that question to my email address. My email address is in the show notes. So [email protected]. Send in that question and we will answer the questions during that episode. But we want to get into today’s episode, and we’re going to talk about a topic that we know a lot of people are interested in. It’s an article that you wrote, Shani, and that is how wealthy you are compared to other Australians. And we know a lot of people like to use this as a benchmark to see how they’re progressing, even though comparison is the thief of joy, right, Shani?
But people are still interested. And today we’re going to talk about how you compare against these traditional measures of wealth. And then we’re going to talk about some non-traditional measures that we think might actually have a deeper impact about how you feel about your financial situation.
Jayamanne: And there are two ways to traditionally measure wealth, which is income and assets. But the data doesn’t lie. Australia is a wealthy country when you do come to those two measures. But we hold significant wealth through net assets and we have strong incomes.
LaMonica: And that doesn’t mean that everybody feels wealthy. So you know being wealthy technically and feeling wealthy are two very different things. And the other side of the equation, and I think why a lot of people don’t feel wealthy, is debt, which Aussies also love. And with debt, of course, comes inflexibility in your life. And as a society, we’re highly leveraged. And that of course reduces cash flow. And there’s a lot of wealth that is locked up in places where we can’t access it. So that could be superannuation, could be housing. But that’s another issue.
Jayamanne: So how do you actually measure up when it comes to those traditional measures and what can you actually do to feel wealthy? Why don’t we start with assets? So based on the latest release of the ABS survey of income and housing, a household net wealth of $2.6 million puts you in the top 10% in Australia. $4.2 million puts you in the top 5%, and $12 million puts you in the top 1%.
LaMonica: And to see where you stack up, take all of your assets, so that’s super, property, anything else you might have, subtract all of your debts, and do this for your household, not just for yourself. And you will come up with a number that you can compare to the figures that Shani had.
Jayamanne: And when we look at the median net wealth, we can look at the median which is a bit more representative, I think, and it’s $579,000 for household, which is one of the highest median wealth figures globally. We have superannuation and high property prices to thank for that accolade. The mean net wealth sits at $1.04 million.
LaMonica: And we mentioned that you need 2.6 million to be in the top 10%, but 12 million to be in the top 1%, and this disparity isn’t representative of the rest of the population. So ABS found that Australian wealth inequality has narrowed over time, and wealth distribution is one of the world’s most equal.
Jayamanne: And this is measured by the Gini Coefficient, which takes a look at how evenly wealth is shared. The Gini Coefficient is a score between zero and one, with one representing one person holding all of the wealth and zero representing wealth evenly shared across the population. Now, Mark, if Investing Compass had a Gini Coefficient, it would be one, and you would hold all the wealth.
LaMonica: So, well, there we go. That’s only because Bitcoin’s down. So if Bitcoin goes back up, then it would be Will.
Jayamanne: It’s Will.
LaMonica: Yeah. Exactly. So the Australian score on this Gini coefficient is 0.53. So the only countries where this is lower is Japan, Qatar, Belgium, and Slovakia. That’s of course in the research sample that ABS used. The countries with the highest inequality are the United Arab Emirates, Russia, South Africa, and Brazil. So we talked about wealth. Let’s move on to income. And Shani, you wrote an article, as I mentioned earlier, talking about what we discussed today, and you have diagrams and data. You have a nice triangle in that article chart. And so that is linked in the episode notes. So go look at the nice triangle that Shani put in her article. And in that you laid out the income you need to be earning as an individual, a couple or household to be in each decile in Australia.
Jayamanne: So for example, to be in the top 10%, you need to earn more than $135,000 as an individual, $249,000 as a couple, or $251,000 as a household. To be in the top 50% or 60%, you need to earn between $100,000 and $126,000 as a couple.
LaMonica: And regardless, and we’ll get back to what we were talking about in the beginning, regardless of your income, if you do have a high level of obligations, that can make you feel not wealthy. And if income comes into your bank account and it’s immediately earmarked to go out again, you miss out on one of the key factors of feeling and being wealthy, and that is choice. And one thing that limits choice is debt. So debt is the main obligation that is holding Australians back. We have a high level of household debt, with the household debt to disposable income ratio sitting at around 182%. And unsurprisingly, mortgages are a big contributor to this.
Jayamanne: To work out your debt to income ratio, divide your total debt balance by your net disposable income. For an individual borrower, Aussie banks generally consider a debt to income ratio of six times or more to be high risk. Even if your debt is considered manageable by a bank, that doesn’t mean that it feels manageable to you. A mortgage can be perfectly serviceable on paper while still creating a sense of financial constraint.
LaMonica: And you really notice the impact of a mortgage when interest rates go up. So the value of your house may not have changed, your income may not have changed, and your net worth may still look impressive on paper, but of course, the amount of money you have to spend every fortnight can change dramatically. And this is why you can’t really consider wealth without debt. And it should be considered alongside it instead of just deducting it.
Jayamanne: That’s right, Mark. So two people could have the exactly the same net worth but have different financial realities. So maybe an example would be helpful. Imagine two scenarios. In one, a person owns their home outright and has a large amount of disposable cash available each month. In the other, a person has the same amount of equity tied up in a highly leveraged property. Their net wealth might be identical, but their financial lives are not.
LaMonica: And we’ll move on now to savings. So savings are obviously an important part of this equation. They do provide another piece of the puzzle to how Australians are doing and how you can compare yourself. So the average Australian savings balance increases by age, as you would expect, but the median is much lower than the average. And that is reflecting the large differences between households. So Shani, you talked about the average savings rate. You went to the OECD to figure this out in your article. So the average savings rate is 6.1% of income, which is interesting because that’s actually lower than the compulsory super amount. At least I think that’s interesting.
So Shani, you included a full breakdown in your article, but the average balance for somebody between 30 and 34 of savings is $21,394 a year. The median is $1,104. So if you’re between the ages of 45 and 54, like somebody we know on this podcast, the average is $52,000 per year. The median is $1,429. And these numbers come from Westpac and the balances in bank accounts by age.
Jayamanne: Again, these numbers don’t necessarily tell us how wealthy someone feels. Someone with $30,000 in a savings account and $500,000 in super might feel financially secure. Someone with $100,000 in savings but significant debt and large monthly commitments might feel considerably less secure.
LaMonica: And I think as we’ve gone through this, you’ve seen how these traditional measures of wealth start to fall down in some areas when it comes to those measures of financial security and financial freedom. So most people don’t wake up in the morning thinking about their position in the Australian wealth distribution. They feel wealthy when they actually have choice.
Jayamanne: And that’s choice over how they spend their money and whether they can say yes to a holiday, choice about whether they have an unexpected $5,000 bill that’s a disaster, or leaving a job that they don’t enjoy. This is why I think that there are several measures of wealth that are more meaningful for an individual that can help measure choice.
LaMonica: Okay. The first that you outlined was discretionary income, and that’s how much money you have left over after paying for all the things you need. And that is different, of course, to an overall income level. So you could earn $300,000 a year, but have very little discretionary income if your fixed expenses are really high. But you could also have somebody earning considerably less who has substantial financial freedom and flexibility. Their housing costs are low, their debt is minimal, and their lifestyle is inexpensive.
Jayamanne: And if you’re looking to compare discretionary income to a national average to see where you sit, ComBank’s IQ cost of living report finds that the average Australian adult has about $1,379 per month available for non-essential discretionary goods and services. How do you compare to this average will play a big role in how wealthy you feel?
LaMonica: The next check you can do comes, and it’s really one of the simplest ways that you can measure financial security. And we do a lot of research on this. Morningstar’s behavioral research team has done this. They found that the biggest improvement most people can make to their financial life is not finding a better investment. It’s building a larger emergency fund.
Jayamanne: So the research goes on to say that there are two categories that measure financial well-being. The first is objective, and the most obvious is the ability to meet current and future financial needs. The second is a little bit more nuanced. It is the subjective feeling of being financially secure and being able to enjoy your life. This feeling will vary person to person and it’ll require a different amount and different levels of that objective goal to be achieved. So for example, one person might feel financially secure holding six months of emergency savings. Another person might think that this isn’t enough and they want at least two years of emergency savings in the bank to have peace of mind. There’s no comparison to others when it comes to an emergency fund. It’s that amount that gives you financial security is completely up to you.
LaMonica: And one thing that our behavioral research team found when they were conducting this study is a lot of people struggle to build an emergency fund. So only 41% of people in the study had a fully funded emergency fund. And those who don’t have an emergency fund struggled a lot to try to make progress in doing that. So most had not reached half their target. 25% had no savings at all.
Jayamanne: And importantly, they found that the likelihood of having a fully funded emergency fund was linked to both objective and subjective financial wellness. Those who felt dissatisfied with their finances were less likely to have good emergency savings behavior. And this effect was larger when a person had a lower amount of investable assets. They found that subjective financial wellness was not always achieved, even with those with high investable assets. So in the study, that was people with more than US$349,000. And a lot of the people in this cohort felt financially dissatisfied, and 30% of them failed to reach emergency savings adequacy.
LaMonica: And this is a little bit simplistic, but really what we’d encourage people to do is reflect on your emergency fund. It may not be the right amount for you to achieve both objective and subjective financial well-being and just a feeling of security.
Jayamanne: So the next metric is low financial obligations. It’s the amount of your income that’s already committed before you receive it. And this is a little bit different to what we discussed with discretionary income in that piece. This focuses on future obligations. What have you committed yourself into the future and what are you obligated to pay?
LaMonica: And psychologically, paying down debt is very different from accumulating investment. So if you pay down debt that offers immediate relief and saving and investing money is really a hope that your sacrifice now will pay off in the future. So an investment portfolio, of course, makes you wealthier on paper, but paying off your mortgage as an example is still something that comes out of your bank account every fortnight.
Jayamanne: And paying off your mortgage doesn’t necessarily maximize your bank account balance, but it can dramatically increase the amount of income that is discretionary. This can change how wealthy you feel. The same principle applies to other recurring obligations. The more of your future income that is already spoken for, the less financial freedom that you do have.
LaMonica: And then the last measure might be the most important one, Shani, and that’s time. So a measure of wealth is how much control you have over time. So money is ultimately a way of giving ourselves choices. If your financial position means you can work fewer hours, take a career break, spend more time with your family, travel, retire early. That is a form of wealth that doesn’t show up in any sort of net wealth calculation.
Jayamanne: And I think this is where the concept of financial independence becomes more useful than simply chasing down a particular wealth percentile. Money is an enabler. If you have enough to control your time and your life to whatever capacity you desire, that is a significant form of wealth.
LaMonica: Alright, Shani, so that is what we wanted to cover in this episode. You know, we were talking before we started this and talking about is comparing yourself useful or not useful. I think everyone’s going to do it, but ultimately it can become a distraction. There is always going to be somebody with a bigger house, a higher salary, a larger super balance, or a bigger investment portfolio. None of these comparisons tell you how financially free you are and how financially free you feel. So Shani, you finished your article with four questions to measure your financial freedom. So what are those four questions?
Jayamanne: Yeah, so I think it’s worth asking yourself, you know, how much of your income is discretionary? How many months of essential expenses could you cover without an income? How much of my future income is already committed to debt or other obligations? And how much choice do I have over how I spend my time? And for me, those numbers tell me how wealthy I am more than any net worth or asset number would.
LaMonica: All right, great. So that’s our episode. Read Shani’s article, see her triangle chart. And if you have questions for our book episode coming up, please send those to my email address and thank you very much for listening.
(Disclaimer: Any advice in this podcast is general advice or regulated financial advice under New Zealand law prepared by Morningstar Australasia Proprietary Limited and/or Morningstar Research Limited without reference to your financial objectives, situations or needs. You should consider the advice in light of these matters and any relevant product disclosure statement before making any decision to invest. To obtain advice for your own situation, contact a financial advisor.)
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