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Smart tips on investing your money wisely

24 August 2021

Investing

A solid financial plan should always involve saving for a rainy day (hello, emergency fund) – but investing your money is different. Whether you’ve got $2000 or $10,000 to invest, here are some options, tips, and strategies to help you get returns on your money.

You may be interested in buying stocks and shares, popping your spare cash in a term deposit – or dipping a toe into options like P2P lending or micro-investing. It all depends on your financial goals. How much money you’re investing, and your risk appetite.

Here, we’ll walk you through the benefits of investing, some common types of investments and how you might want to invest different sums of money.

Investing money: the benefits

Typically, people who start investing are looking at diverse ways to grow their wealth. And you may be considering it after saving a lump sum, getting a bonus at work, or receiving funds you weren’t expecting, such as an inheritance or generous tax return. Using the money as wisely as possible, with your future financial wellbeing in mind, is your goal.

So, what are the benefits to investing? Firstly, it’s different from saving in the sense that you’re not just putting money aside. You’re putting your money to work – to hopefully earn you a better return long-term. Investing can be a way to grow (or compound) your wealth, earn extra income and ultimately, create more long-term financial security.

However, it’s a good idea to clear existing debts before you invest, especially with debts such as credit cards, as these carry such high rates of interest.

How to start investing

While you may be under the impression that you need a small fortune before you do any investing, it’s not the case. You can start even with a modest amount of money. The sooner you start, the quicker you’ll usually see your money start to grow.

When starting out with investing, you want to ask the following questions:

How does this investment work?

How does it generate a return and what return can I expect?

What are the risks involved?

What are the fees and charges for buying, holding and selling the investment?

What timeframe do I need to invest to receive the expected return?

You may also wish to do some research on the mechanics of investing – for example, if you want to buy shares, do you want to use a financial planner? A broker? Dabble yourself with online investment platforms? You may wish to start with someone who can advise you and make the transactions for you, then do your own investments once you get the hang of it.

Types of investments

Whether you buy shares or pop a lump sum into a term deposit, there are lots of ways to invest these days. Here’s a rundown of some different options.

If you have $500-2000 to invest…

Share trading When you buy shares, you’re investing in a company – which can offer good potential for capital growth and may provide income known as dividends. You can start investing in the share market with small sums of money and the average return on your money is 6.5 percent annually. The investment risk can be quite high, but it’s relatively simple to get in and out of the market if you need access to your funds.

If you have $5000 to invest…

Term deposits This type of investment involves locking your money away for 1-5 years on a fixed, higher interest rate. Because the rate is locked, it’s not subject to market fluctuations and you’ll have certainty around the return you’ll get at the end of the term. Generally, the longer you lock your money away, the higher the interest rate. Term deposits may suit if you have a lump sum of $1000-10,000 to invest and you want a low-risk, set’n’forget option, but be aware if you do want to get your money out early, you may have to pay penalty fees.

If you have $10,000 to invest…

Offset accounts If you have a mortgage with an offset account and you put a lump sum into that account, it essentially ‘offsets’ the interest you pay on your mortgage, potentially saving you thousands. For example, say you had a home loan of $300,000 with $10,000 in your offset account. You’ll only pay interest on $290,000 ($300,000 minus $10,000). Over a 30-year loan at an interest rate of 4.5 percent, you could save over $25,000 in interest, just by having that lump sum sitting in your offset account. This sort of account may not suit everyone and it’s important to read up about potential negatives including: the account may have a higher interest rate than a mortgage without it. Some lenders may also charge a monthly account-keeping fee and some lenders might also charge you each time you withdraw money from the account.

Super funds Growing your retirement savings is arguably the best investment of all – and experts suggest socking away 15 percent of your annual income towards it. Currently, your employer has to contribute 9.5 percent of your gross salary into your super, so you could top it up with salary sacrificing or make pre-tax or after-tax contributions. The beauty of investing into super is that you pay a much lower tax rate on super contributions, and if you start building your super in your 20s, you may well end up with a nice, plump retirement nest egg.

Other options

Peer-to-peer lending Also known as marketplace lending, or P2P lending, these are essentially managed funds operated via an online platform. These platforms enable someone to borrow money directly from an investor, rather than going to a bank. Borrowers can get a cheaper loan than they could with a lender, and investors make a bit more interest than they might at a bank. You can invest anything from $10 to $100,000, and you may be able to decide how your money is used. The downside is, it can be risky: the borrower may fail to repay the loan and there’s no government protection for P2P lending.

Micro-investing This is a cheaper option to start building an investment portfolio, using micro-investment apps to invest a few dollars at a time into an investment fund, on a day to day or monthly basis. The pros? You don’t need to outlay huge sums to start investing, so if you’re looking for a baby-steps strategy, this could be it. The downsides are that the fees may eat into your returns and you are playing a long game to build up wealth.

Savings accounts Investing in a savings account is a short-term, low risk strategy that serves up an average 3 percent return per year. You can easily get your hands on your money if you need it – but if the account is offered on a standard variable interest rate, it’s subject to market fluctuations (which can affect your returns). If you still like the idea of having your funds close to hand, look for a high interest savings account that offers bonus interest if you deposit a certain amount each month, which can help maximise your savings.

Have a plan

Investing can be a savvy way to grow your wealth for the future – but it is important to have a plan, figure out your financial goals and put a timeframe on your investments.

You may also want to consider diversifying your investments to spread the risk, and also look at having some long-term and short-term investments in place so you can always get access to your money if you need to.

Educating yourself about investing (for example, in shares with the ASX’s online courses) can help increase your investing knowledge over time. Similarly, having a financial advisor you trust can also be valuable, to help you review your investments and your financial goals to keep you on track.

This information is general in nature and has been prepared without taking your objectives, needs and overall financial situation into account. For this reason, you should consider the appropriateness for the information to your own circumstances and, if necessary, seek appropriate professional advice.

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