How to Take the Bank's Money to Create More Wealth

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...

Why you’re better off investing your money

According to the ABS, Australian household debt grew to 7.3 per cent by 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 per cent. 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 their 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 create more wealth in our lives. Absolutely! As we know, the money we deposit in 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 banks money, so we profit from it.

Let’s assume you borrow $10,000 at 6.9 per cent over 5 years. While most borrow money to buy assets that depreciate, what would be the outcome if you invested this money instead? Based on a 5 year loan, your repayments 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 5 years on the All-Ordinaries Index was 4 per cent while the average dividend yield was also around 4 per cent. This period includes the COVID meltdown that occurred in March 2020, which implies that in a normal market the return would actually be higher.

If you had invested the $10,000, then in 5 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 is payable on the loan, you would be $2,286 or 23 per cent better off using the banks money to make a profit for yourself. If we assume the same growth rate over a further 5 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 in a positive way to make money for yourself.

What were the best and worst performing sectors last week?

The best performing sectors included Information Technology up 4.73 per cent followed by Energy up 1.09 per cent and Utilities up 0.21 per cent. The worst performing sectors included Materials down 3.52 per cent followed by Consumer Discretionary down 3.21 per cent and Consumer Staples down 1.93 per cent.

The best performing stocks in the ASX top 100 included Altium up 7.91 per cent followed by NextDC up 6.77 per cent and WiseTech up 5.20 per cent. The worst performing stocks included Fischer & Paykel Healthcare down 11.36 per cent followed by Treasury Wine Estates down 11.25 per cent and Pilbara Minerals down 9.02 per cent.

What's next for the Australian stock market?

Once again, we have validation last week as to why we need to wait for confirmation of a move before investing given that the All Ordinaries Index fell away to finish the week down 1.70 per cent. More importantly, the market fell below the low of 7,336 points from three weeks ago, which will help to determine the direction of the market over the next few weeks

Obviously, the events in the US are affecting the Australian market with all the noise about the US debt ceiling being talked about like it’s a financial Armageddon. While I understand the ramifications if the US defaults on its debt, the chances of that happening are very low, which was finally announced late yesterday.

If you remember, we experienced this exact same scenario last year with the same rhetoric, yet the outcome was positive. Remember, the Australian stock market bottomed in June 2022 before rising 18 per cent into February this year. Right now, I’m of the opinion that the big end of town is taking advantage of the current situation to manipulate the market.

Last week, the tech sector also rose strongly in the US after Nvidia posted good results causing it to rise over 20 per cent. Unfortunately, many Australians jumped into the Australian tech sector last week believing there were opportunities to be gained, but sadly this thinking is flawed and dangerous as many will discover. Stocks rise and fall on good fundamentals and while short term speculation can result in short term moves, everything always reverts to whether a company is good value at the time you invest.

So, where is the Australian market heading? Right now, we need to be cautious and expect further falls in the short term, as it is possible the market could fall below 7,000 points. That said, anything is possible, as we have seen, but I still believe the second half of 2023 will be bullish. So again, be patient, don’t react emotionally to news and get prepared for the bull market when it does return.

For now good luck and good trading.

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.