You may be a brilliant money manager with healthy spending habits, a realistic budget and not much debt. But if you’re not investing your money you’re never going to really move ahead financially.
The fact is, investing puts your money to work. So you need to do less of the heavy lifting growing your wealth.
The good news is that investing is easy, and there are plenty of options that let you get started.
What holds a lot of people back is not knowing what to invest in. Let’s fix that, so you can launch your plans to invest.
Understand your goals
Investing is about setting goals for yourself and choosing investments that let you achieve them. It also involves knowing how you feel about risk because different types of investments are more risky than others.
The higher the returns, the greater the risk you could lose money. It’s one of the basic rules of investing. If you come across anything promising high returns for little or no risk, it’s a fair bet you’re looking at a scam. Give it a miss.
Where to invest
Most investments fall into one of four main categories: cash, fixed interest, property and shares. There’s no real need to look outside of these.
There are some very complex investments around that can make it hard to understand how you’ll make money, let alone work out risks involved. That’s why it can be best to stick with the basics.
- Savings accounts – expect low returns
If you want a safe and steady return without any risk of losing your money, savings accounts are the way to go.
The catch is that you’ll earn a very low rate of interest. In fact, the purchasing power of money stored in a savings account will fall over time thanks to inflation.
So, while it’s always smart to have emergency savings on hand, leaving large chunks of cash in a savings account won’t help to grow your long term wealth.
- Fixed interest investments – are you prepared to lock in?
Fixed interest investments cover a wide variety of options including government bonds, which you can invest in through the Australian Securities Exchange (ASX). The common thread is that you’ll earn a set rate of interest for a given period.
For most people, a term deposit is the easiest fixed interest option. Here too, the returns are low but the stability of a fixed return can make future planning easier – and help to counterbalance the volatility we see from time to time in other investment markets including shares.
- Property – ready for commitment?
Property has delivered outstanding returns in recent years. The downside is that buying a rental place often involves taking out a major loan. That’s something not everyone is comfortable with or able to qualify for.
In addition, a solid chunk of your purchase budget will be gobbled up by buying costs like stamp duty, legal fees and loan application fees. That doesn’t make property a bad investment – after all, rent returns can be a good source of regular income. Just plan to hold onto the place for the long term especially as it can take time to recoup those initial buying costs.
- Shares – which to choose?
Shares can sound complex (they’re not) but they do have a lot going for them. They have a track record of strong long term – and tax-friendly – returns, and they’re very low maintenance (no Sunday morning phone calls from a tenant complaining that the roof is leaking). Long story short, if you’re happy to take on more risk, shares can be a rewarding long term investment.
The dilemma is that with around 2,000 companies listed on the ASX, how do you know which shares to buy? It’s a question that stumps plenty of people, and that’s where exchange traded funds (ETFs) offer a simple solution.
ETFs spread your money across a variety of underlying shares, so you don’t have to second guess which will make a good investment. This also gives you more diversification than you could probably achieve yourself, and spreading your money around this way helps prevent a handful of duds dragging down your overall portfolio.
As ETFs typically aim to mirror a particular market index, like, say the ASX 200, they don’t need to undertake heavy-duty research. This means they can afford to charge super low fees – in some cases juts 0.10%. If you’re keen to invest in shares, and you’re happy to accept the returns of a given index, ETFs can be a hassle-free option to get into the stock market.
When should you start investing? Now!
I’m not worried about what you invest in (unless it’s a suspect offer that’s arrived via an out-of-the-blue email). What does concern me is if you keep putting off getting started.
Success breeds success – so go ahead, work out your goals, where you want to invest and start spreading your money across different opportunities.
I can’t guarantee you’ll always pick a winner. But if you choose your investments with care, over time your money will be humming along doing plenty of the hard yards on your behalf to grow wealth.
This article first appeared in InvestSMART and has been republished here with permission.
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