Starting to earn some money but not sure what you should be doing with it? We’ve asked some experts about some investing options.
If you’re just entering the workplace or have been working for a couple of years, it can be tough to know what you should be doing as you start to see the paycheques coming in.
Of course, spending it all on an overseas holiday or on a one-off purchase is pretty tempting, so we’ve asked the experts what are some responsible alternatives.
It follows a number of people writing into the ABC Personal Finance project asking us about investing while they are young.
Sarah Parkinson was one of them, asking: “should I start buying shares now, or wait until I have bought a house first? I’m assuming here that a house is as good an investment. Is it?”
Kate asked us to look at investing:
Kate B wrote in on behalf of her son to ask: is it a smarter choice to save for your first car, or first house?
She says her 16-year-old son is steadily saving, but is unsure where to invest his money.
“Cars depreciate so quickly, and public transport is still an option for him while he’s at school,” she said.
“Would it be smarter for him to aim for a house deposit with parents as guarantor, or spend the money on a car?”
So we’ve had a look at investing in shares and other investment options you could consider, depending on your own personal situation and risk appetite.
We don’t give financial advice and there is no blanket rule but most experts agree that the important thing is to have some kind of financial goal early on.
And because of the gender pay gap, that is even more important for young women than it is for young men. A number of reports have found that economic disadvantage places them at increased risk of poverty as they age and impacts their health and safety.
In discussing the pros and cons of some major financial goals, we’ve spoken to five experts: Griffith University lecturer Laura de Zwaan, University of Tasmania finance lecturer Maria Yanotti, University of Western Australia associate finance professor Lee Smales, Curtin University senior finance lecturer Niger Sultana and Adelaide business school marketing professor Arvid Hoffmann.
This article contains general information only. It should not be relied on as financial advice. You should obtain specific, independent professional advice from a registered financial planner in relation to your particular circumstances and issues.
Option: Buy a house
It’s the Australian dream. And it seems like the most obvious option for people looking to invest their money.
- Owning a house provides you with financial stability later in life
- Generous tax advantages in owning an investment property
- Average return over the past 30 years has rivalled sharemarket
- It’s an asset that should appreciate in value over the long term
- You can use it as equity one day
- If you jump into it too early, you risk ruining your credit record if you get into financial trouble
- The amount of money required to buy the investment
- Prices can change — not continuously going up
- Opportunity costs — you might not be able to go out as much or go on as many holidays
- Financial costs involved (associated fees, interest, ongoing rates, maintenance)
If you’re looking at buying a property to live in, it might not have the tax advantages of an investment property, but it does have the advantage of providing a roof over your head.
“Perhaps the greatest advantage provided the mortgage is paid-off or close to paid by the time you retire is that living costs will decline at the same time as your income falls (i.e. you retire),” Dr Smales said.
“So it provides a means of matching cash-flows.”
Many view it as way
There are also non-financial considerations involved in deciding whether to buy your own home — including stability, longer-term planning, flexibility of doing your own home maintenance, no-one to answer to (except maybe your bank) and freedom to use the space how you want.
On the other hand, if you’re looking at an investment property, Dr Smales says it’s become a very popular type of investment in Australia for two key reasons.
On one hand, house prices have generally gone up quite significantly over time (particularly in Sydney and Melbourne).
And on the other, there are quite generous tax advantages in terms of negative gearing and capital gains.
Dr de Zwaan points out the “biggest pro with buying a house is you will be accumulating an asset that should appreciate in value over the long term“.
But she suggests you take time to look at all the costs associated with your investment.
“If you have someone willing to help you, that’s great, but you still need to be able to afford the other costs of buying — mortgage repayments, rates, insurance, repairs, and utilities,” she said.
She says that young people should be looking at “saving as much as they can for a deposit” whether it be for a home to live in or an investment property.
Dr de Zwaan pointed out the Government’s proposal to drop the required deposit to 5 per cent from January 1 next year without invoking costly lenders mortgage insurance, could help make this goal seem more achievable.
Dr Sultana agrees that saving is important and adds you should also consider your risk appetite and your stage of life.
She says when you’re just starting out in your career, it’s important to consider whether you’re ready to jump into a mortgage.
“You are already in the system and if something happens in terms of career change, or something else, then you already have a huge commitment,” she said.
Ms Yanotti says the strategy of buying a house is a smart idea.
But if you’re thinking about getting an investment property, she warns there is evidence of a “home bias” in residential real estate in Australia.
Basically, most property investors tend to invest in residential property close to their place of residence.
Her tip? She says a good strategy is then to think of aiming for an investment property with good returns — whether that be buying in a growth area or one where you can get good rental yields — and which is affordable.
Things to consider:
- Saving for a deposit first: Most experts suggest having at least 20 per cent of your loan value
- Your values, your risk appetite and your life stage
- Decide where you can afford to buy so you’re living within your means
- Non-financial factors such as stability, freedom and longer-term planning
- Talking to a trusted financial planner
Option: Buy a car
You might see buying a car as more of a necessity than an investment.
You’ve probably heard the old adage that a car loses value as soon as you drive out of the dealership.
“Unless you are buying a classic Aston Martin or Ferrari (out of the price range of most) then cars are a depreciating asset and so are generally not a good investment in the classic sense — although if it’s the only way to get to work then that’s a different story,” Dr Smales said.
- Easy mobility and freedom, especially if you don’t live near public transport
- Useful asset
- It’s also a depreciating asset
- There are ongoing costs: registration, insurance and fuel
- It won’t last forever
For the sake of comparison, weighing up whether to buy a car or a house first might depend on how much you have saved and your income.
If a house seems like more of a long-term investment, it might make sense to wait and perhaps buy a car first, especially if it’s the only way to get around.
Given a car is a depreciating asset, you’ve got to be really careful, particularly when thinking about getting car loan finance.
“There are a lot of pros and cons in terms of car financing and I would think very carefully and, if [it was me], I would like to spend more from my savings, rather than borrowing,” Dr Sultana said.
Most experts agree that the important thing is to have some kind of financial goal early on. (Unsplash: Jeremy Bishop)
Dr de Zwaan said if a car was a necessity, then you “should save to purchase it”.
“A car is generally not an asset that is going to appreciate, so it’s important to be sensible and limit the amount you are looking to spend,” she said.
“Save as much as you can and try to buy it outright to avoid finance.”
And if you’re borrowing to buy a car, Dr de Zwaan says to remember that cars come with a lot of additional costs, including stamp duty, rego, CTP insurance, third-party property insurance, repairs, servicing, fuel and parking.
“So being able to afford the loan is not the only consideration,” she said.
Things to consider:
- Set a maximum price limit and keep it front of mind when searching
- Do some research online — check the value of your car by searching similar models online, especially second-hand cars
- Ask yourself if it’s worth the cost? Not just the price of the car but the insurance and ongoing costs
- Think about what time of year you’re buying, sometimes there are special deals around the end of the financial year, etc
- How much can I afford? What can I comfortably pay off and how much do I need to borrow?
- Do the terms and conditions suit me? Do I want to be paying it off still in five years?
Option: Invest in the share market
Dr Sultana says a lot of us have a fear of the share market.
“There’s this fear, that might have been created by stock market crashes, where you might think to yourself ‘if I lose, I’ll lose everything,'” she said.
- Over the long term it tends to have high returns
- Don’t need tens of thousands of dollars to get started
- Ability to take bigger risks once you’re familiar with the markets
- Liquidity: Faster access to your cash since it’s easier to sell shares over a house
- Need to do your research
- Volatility of returns (it can have significant losses in some years)
But she says if you’ve done your homework and you’re with a proper financial planner who can help you, “you can actually invest in a firm where your money will grow”.
“If you make a bad choice, then there may be a bad consequence but there are a lot of opportunities there as well,” she said.
And as Dr Smales points out, the younger you invest the better off you can be.
“For instance, if you invest just $5,000 per year starting at age 25 and it grows by 5 per cent per annum (around what the stock market has done in the last 10 years) then you will have $634,000 at retirement,” he said.
“If you wait until 35 to start then you will have just $349,000 — a difference of $285,000.”
Dr de Zwaan agrees, saying it could be a good option if you’re able to “withstand the ups and downs and are looking at long-term investment”.
“You can start investing with a relatively small amount of money, but you should be wary of brokerage costs,” she said.
Dr Smales says a lot of academic research has shown that it is difficult to pick individual stocks that out-perform the market, which is known as active investing.
He suggests that for those who aren’t as familiar with the market, another option is investing in a diversified portfolio of stocks that tracks the index, known as passive investing.
One popular way to do it is through Exchange Traded Funds (ETFs).
Ms Yanotti says the trick is to start with small amounts and probably play relatively safe until you learn more and are more ready to take larger risks.
“One more trick is to play with your gains from previous share market investments only,” she said.
There are also apps out there which are aimed at helping you get started, but always do your research before spending your money with them.
Things to consider:
- Your risk appetite: are you a risk taker or more risk-adverse?
- Start with a small amount of money until you learn more about the market
- You can reinvest your gains into diversifying your portfolio
- Take a proper research-based approach
- Seek professional advice
Option: Start a side hustle or business
What to do if you’re looking for some extra cash to put in your wallet. (ABC News: Tim Madden)
If you’re a budding entrepreneur, the idea of starting your own business might be appealing.
“If you look at the ‘rich list’ then the majority of members will be there as a result of starting their own business (e.g. Jeff Bezos, Bill Gates, Mark Zuckerberg, Larry Page),” Dr Smales said.
“The potential monetary benefits are therefore huge — and there are also the benefits of being your own boss and seeing an idea come to fruition.
Social media has allowed people better connect with potential customers. (Unsplash: RawPixel)
Ms Yanotti says investing in your own side hustle or small businesses can spark the entrepreneurship side of us.
- Can provide huge satisfactions and rewards
- Creates more opportunities for yourself
- Enriching learning experiences — whether you succeed or fail
- In terms of side hustles, having multiple sources of income gives you options
- Costs in initially setting up
- Can be very risky — most fail within the first three years
- They can takes up a lot of your time
- Generally low income or even negative income for side hustles
“Believing in a project and attempting to make it work can have huge satisfactions and rewards, but most importantly, they are enormous and enriching learning experiences, whether the start-ups succeed or fail,” she said.
But Dr Sultana warns they run their own risks as well.
“Wherever you invest — real estate, stock market, or starting something small on your own — it has to be done wisely with proper knowledge,” she said.
Professor Hoffmann says it’s always worth considering the costs and tax implications, as many people operating in the online space might not realise they are liable for tax.
“Whether it’s a good investment decision or not obviously depends on if there is demand for what you can do,” he said.
“So it comes down to you doing your research or a survey of the environment and letting that guide you.”
On top of that, it’s also worth looking at insurance and compliance costs associated with running a business.
On the idea of side hustles, Dr de Zwaan says most will not make a great deal of money.
“There are success stories, but they are generally the exception,” she said.
Things to consider:
- Do your research first
- Is the business you are starting actually an ‘investment’ (that you could potentially sell for a profit in the future) or just a job that you have bought?
- Be aware of your own time constraints (how much of it will you need to spend on this?)
- It might be worth seeing a financial adviser
Option: Invest in myself (education)
More study might not sound that enticing if you’ve just finished school or spent four years doing a uni course, but there are some advantages to furthering your education.
- Positive impact on productivity
- You can become more employable and improve your job prospects
- Creates opportunities that might not otherwise be available
- It can be a huge cost (especially if you’re not able to get a loan)
- Opportunity costs
- You can burn out
You can develop further skills and increase your employability and it can also be a good option for those of you already considering a career change.
University graduates can also earn approximately $800,000 more than school leavers over a lifetime.
An apprenticeship or TAFE cause can also help with broadening your career prospects.
Professor Hoffmann says this is a really worthy financial goal when you’re young, as long as you consider whether there are enough jobs in your chosen industry and the long-term costs.
“At the moment the demand seems to be artificial intelligence, digital, technology, data analytics, etc, so you have to think where the demand will be in the future,” he said.
“So in that sense be specific in terms of what education you’re investing in.”
The other thing to consider is your existing debt from the Higher Education Loan Program (HELP), which some of you might know by its former name HECS, and whether further study is worth adding to it.
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“So maybe think about first doing a bachelor degree, go into the job market and then maybe think of further education, maybe even get your employer to co-invest in your education,” he said.
“You have to be a bit smart about it, not just think spending more time studying always equates to higher market value.”
For those of you who have already completed your studies and aren’t looking to upskill, you could consider paying off your existing HELP debt.
Experts advise that you are better off paying “bad debts” — such as personal loans for a car or a holiday, or a credit card that typically has higher interest rates — first. But if you don’t have any, HELP could be your next option.
Melissa Browne, a financial adviser and accountant who has written books on personal finance, previously told the ABC that “HELP debt is actually OK debt”.
That’s because HELP debt doesn’t attract interest, it’s just “indexed to inflation”.
Basically, the debt is raised each year in line with the cost of living. Last year, the indexation rate was 1.9 per cent.
Some people to choose to pay their HELP debt off earlier because student debt can affect how much you can borrow for a house.
Things to consider:
- Consider market demand for your degree and the jobs you can get
- Work experience: Have you done work in your chosen field yet?
- It might be worth paying off your HELP if you’re looking to one day get a home loan
Option: Keep it in your bank
This is probably the least risky of all the investment options and might be best suited to you if you’re a bit risk averse with your money.
- Easy to keep track of
- Security: There’s almost no risk of losing your money (as long as you are with a financial institution that is covered by the Australian government deposit guarantee)
- Easier to access money than other investment options
- You earn a higher rate than if you just left it in your everyday bank account
- It’s a fixed interest rate
- You might not have the freedom to withdraw the money whenever you want, a fee might apply
- They might provide a smaller return than other investments so do your research
There are a couple of ways that you can invest your money in the bank, including in term deposits or more everyday high-interest bank accounts.
Dr de Zwaan says if people do have savings, they should keep it in a high-interest savings account.
“This provides a guaranteed return while still accessible if needed,” she said.
Professor Hoffmann says it’s important to match the risk and return characteristics of your financial instrument to your goal.
“That is, if you need the money in the short term, you might not want to invest in higher yield — but more risky investments — as you may not have the time to recover from a temporary loss,” he said.
“Your return may be low or negative but at least you’re building up an amount and are not subject to the short-term volatility that might come from [investing in the sharemarket for example].
“If you don’t need to money in the short term, and can afford to wait and ride out temporary fluctuations in value, you can invest in higher yield and more risky investments.”
Dr de Zwaan says if people do have savings, they should keep it in a high-interest savings account. (AAP)
Ms Yanotti says interest rates are quite low at the moment, so you would expect other investments to have better returns than a term deposit or a savings account.
“However, they may be a good place to start,” she said.
“Term deposits and saving accounts are always relatively safe bets.”
Professor Hoffmann says this might not always seem like the best option, especially given the low-interest environment, but it might also be worthwhile if you’re looking at creating an emergency fund.
“That way you’ve got some money if you lose your job or your car,” he said, adding you should make sure to have at least three months of your salary put aside in the fund.
Things to consider:
- What deposit are you getting or can you get for your money? Is it worth switching to a fund with higher interest?
- Consider accumulating an emergency fund
- Think about your short-term and long-term savings goals, this should guide your investment decisions
Option: Get cryptocurrency
Investing in cryptocurrency seems to have become all the craze in recent years, despite it not having initially been created as an investment vehicle.
- Some people have made a lot of money investing in cryptocurrency
- Underlying blockchain technology continues to attract investment
- It’s not regulated so you have few safeguards
- It requires expertise
- The value can fluctuate a lot
- Your money can be stolen or lost quite easily
And as the last year has demonstrated, the Bitcoin bubble eventually popped, as people became nervous about the underlying value, possible government crackdowns and a series of high-profile hacking incidents.
So what does this mean for it as an investment option?
According to Dr de Zwaan, “it’s a developing area, so that comes with risk”.
“It’s definitely safer to keep your savings in a bank,” she said.
“Without expertise in this area, it would be difficult to pick which cryptocurrency is going to increase in value.”
As law lecturer Philippa Ryan wrote in the Conversation, cryptocurrencies are mostly created by anonymous entities, are currently unregulated, and may not always refund money upon request or allow the resale of tokens.
“Investors are often left in the dark with respect to their entitlements, rights and benefits,” she wrote.
Professor Hoffmann recommends people “stay away from cryptocurrency unless they think they really understand it”. (Reuters: Benoit Tessier)
Professor Hoffmann offers the same warnings, recommending people “stay away from it unless they think they really understand it”.
“I would say it’s the equivalent of gambling,” he said.
“At least at this stage, it’s very, very volatile and very speculative.
“It may seem like an interesting alternative now that we have a low-interest environment … [but] I would caution the average person on the street to stay away from them.”
Things to consider:
- Do you have expertise in this area? Would you know which areas are best to invest in?
- Are you risk-averse? Could you handle the volatility?
Option: Top up superannuation
Dr de Zwaan says topping up your superannuation contributions can be of huge benefit later in life.
- Build up a healthy nest egg for retirement
- Forced savings
- Compound interest means there are benefits in getting on top of it early
- Tax advantages through salary sacrificing
- Low income earners may be eligible for a government co-contribution
- You won’t be able to access it for some time
“Of course, if you are able to, saving within the superannuation environment when you are younger will make a significant difference come retirement given the benefit of compounding over long timeframes,” she said.
But she says it’s worth considering how much you’re putting towards it since there are restrictions on accessing it until you retire.
Professor Hoffmann agrees, saying putting some extra money aside for your super and making it a habit every fortnight, even if it’s just a small amount, is also a good way of building a savings habit.
“Putting money in regularly and seeing it grow makes you feel that you’re achieving your goals and makes you want to stay committed to that goal,” he said.
But it’s worth remembering, that once you invest in super, you can’t really pull it out again until retirement.
One exception is the first home super saver (FHSS) scheme, which allows first home buyers to save a home deposit within their super fund.
The scheme came into effect on July 1, 2017, and allows any personal voluntary contributions you make to your super to be withdrawn to help buy or build your first home — although contributions to defined benefit super funds are not eligible for release under the scheme.
Dr de Zwaan says topping up your superannuation contributions can be of huge benefit later in life. (AAP: Joel Carrett)
Under the FHSS scheme, you can withdraw up to $15,000 of eligible contributions made over a financial year or up to $30,000 in total for all years.
Although some changes have been made to the scheme, so it’s worth checking them out here.
Starting to put some money aside earlier might also help later in life if you need to take time out of work to start a family. It highly likely you won’t be getting paid any super during that time.
If you’re in that situation, experts suggest looking at non-concessional super contributions, which are after-tax super contributions because you have already paid tax on the money.
The cap for after-tax contributions is $100,000 per financial year.
At the end of the day, it’s worth making sure you’re in a financially stable situation, having paid off your debts and with some savings and an emergency fund in place before you think about putting money away for the long-term future.
Things to consider:
- Are you in a financially stable position? It’s worth paying off existing debts before looking at investing in your super
- Can you salary sacrifice some of the amount?
- Look at the fees you are paying and see if you can save some money by switching funds as well
Are you a young woman who needs help to manage your money?
We know you have unique challenges as overall, young women:
- Earn less than men
- Have less money in our superannuation
- Are more likely to have career breaks
- Have lower levels of financial literacy
It’s time to change things. We want to help you to become more confident about money and have the skills and information you need to shore up your financial future.
So let’s do it together.
Send in your questions about money using the form below and we’ll try to get our journalists to find you an answer.