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Create wealth in 2016 with this valuable New Year’s resolution

Credit: Horten123

According to Westpac’s 2016 New Year’s Resolutions Report, almost 70 per cent of Australians are making financially-focused New Year’s resolutions.

The report goes on further to say to that four in five of those people have an average savings target of $11,234 for the coming year.

Interestingly, the top priorities for saving cash are to travel or take a holiday and to build a rainy day fund.

Anyone who has made a financial resolution in the past knows that it can be difficult to achieve and Westpac’s research shows 60% of people who made plans in the past year did not reach their goal.

On average, those surveyed kept their resolution for about four months and the biggest reasons for failing to reach their goal was a result of setting unachievable goals or an unexpected change in personal circumstances.

Personally, I will be one of those people making a New Year’s resolution to save more money over the coming year. Although I would love to spend it all on a lavish overseas holiday, I will instead be trying to build wealth through the power of compounding.

My plan is simple and achievable (I think!) – save a portion of my salary each week and look to buy great value stocks that are likely to grow over the coming years.

To show how this plan will work, here is a worked example:

Let’s assume that you will be able to save and invest 50% of the survey’s average savings target. That’s around $5,600 over the whole year or around $108 per week. That seems pretty reasonable (considering you would still have more than $5,600 for travel and other fun things) and is a good start for many new investors.

Next, assume you start with zero dollars in your bank account and you are able to achieve a 6% investment return on your savings each year over the next 20 years. That is quite plausible considering that Australian equities have returned 9.5% per year on average over the past 20 years.

At the end of that 20-year period, still only saving $108 per week, you will have ended up with more than $206,000.

If you are savvy enough to invest in a handful of top performing stocks along the way that have delivered long term returns like REA Group Limited (ASX: REA), CSL Limited (ASX: CSL) and Ramsay Health Care Limited (ASX: RHC), your investment return is likely to be closer to 10% per year.

At a 10% annual average return, your balance will grow from $206,000 to an impressive total of $320,000. Keep investing that $108 per week for another 10 years and your wealth will have grown to more than $923,000!

It’s clear from this simple example that investors should use the power of compounding to grow their wealth and picking the right stocks will also make a big difference over the long term.

With 2016 just around the corner, there is no better time to start creating wealth through this simple, but highly effective, investing technique.

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Motley Fool contributor Christopher Georges owns shares in Ramsay Health Care. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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