If you have money to spare, you should invest it. Money put to no use is money being wasted. It should at the least be in the bank accruing interest, or you can put it to even more use by investing in one of the following ways—
Pay Off Debts First
Instead of making money investing, you will probably make more financial gains by paying off your debts. The money you save in debt repayments will most likely be more.
There are two main ways to pay off debt: the debt snowball vs the highest interest approach. The highest interest approach involves paying off the debt with the highest interest first, and then the next highest interest and etc., so you end up paying the least interest overall. Versus the debt snowball which involves paying off the smallest debt first up to the largest debt. Mathematically, the highest interest approach is the fastest way to pay off debt—you will end up paying the least money overall. However, in actuality the snowball method has a higher success rate because it is better at changing behaviour. It is more satisfying to pay off debts this way psychologically. Based on your own knowledge of your behaviour and financial situation, you should use the method that suits you.
Or, for lower interest rates and lower debts altogether, along with better terms and even a different lender, you should consider debt consolidation. Debt consolidation is a service offered by Get Out of Debt Today that can save you thousands upon thousands of dollars and dramatically simplify your financial situation. If you have multiple debts with bills coming in round the clock, debt consolidation combines these into just one easy-to-manage debt with payments that we ensure—through negotiating with the lender and budgeting with you—that you can easily pay. If you think that debt consolidation sounds like the debt solution for you, call (02) 9011 7919 or fill out the form in the sidebar and we can contact you!
Or for more information, read some of our other articles on debt consolidation:
Build An Emergency Fund
If making investments that are difficult or costly to withdraw from (the classic example being a term deposit), then it is important that you build an emergency fund in addition. This is a rainy day fund—some money set aside that can be easily accessed in case you need it for an unexpected purpose that has arisen.
An emergency fund shouldn’t be cash stashed away behind your bed, it can be an investment, albeit not a risky or low-liquidity one. We recommend putting it in a savings account with the highest interest rate you can find.
The Australian government recommends having enough in your savings account to cover 3 months of expenses and we agree that this is a sensible amount.
Add To Your Superannuation
Along with paying off your debts, another option that can give you more payout than investing is adding to your super. Whilst this is a long-term option that will not give you immediate rewards, don’t groan yet because like paying off your debts, it also has a virtually 100% chance of providing payout, unlike any other form of investing bar putting it in the bank.
There are two ways to contribute to your super (source: Aus gov):
- Salary sacrificing: asking your employing to put more of your pay into super
- After-tax contributions: when you add to your super directly. These contributions are non-tax deductible however
And if you are low income, contributing to your super will have added benefit because you can get Government Co-Contributions and Low Income Super Contributions which are both when the government makes contributions to your super whenever you add to it.
The foreign exchange market (FX or FOREX) is when you invest in foreign currencies through buying and selling them for profit.
This section is included here basically just as a warning. Just to tell you not to do it. Because FOREX trading is risky, complicated and usually not the most rewarding.
To make money FOREX trading, you have to be able to predict the way that currencies are moving relative to your currency, otherwise you won’t make money. There are so many factors affecting each exchange rate and they are highly volatile, so it is very difficult to predict the relative movements of two currencies.
This is one best left for Wall Street.
Term deposits are a safe option that can get you higher rates of return than a bank account but—and this is the strongly held albeit personal opinion of an investor—they aren’t worth it for the combined reasons of: (a) their rate of return isn’t high enough to justify (b) their complete lack of liquidity. Liquidity is basically how easily you can convert your investment back to cash. Term deposits make you commit to a large number of years where your money is held by the bank until you can get your money back without incurring steep financial penalties. I am yet to see a term deposit that is a good deal for anyone who has considered the other options that we recommend.
Precious metals are shiny, however they are used more for hedging your investments against economic collapse than an investment. They don’t rise in value quickly enough. Economic collapse means a complete collapse by the way, not just a downturn. In which case the most likely eventuality in our opinion is that society would revert to barter than to the gold standard, at least for over a lifetime.
Rare coins and other collectibles are just that—collectibles. What makes these less lucrative than other investments, as cool as they are, is that they don’t circulate very much because of the collector’s tendency to collect them—to just keep them for their whole life. They are not needed for consumption and are only even profitable at all in thriving economic conditions. Economic downturns really hit them hard because they are so nonessential.
The share market aka the stock market is when you invest in businesses. A share is part ownership in a business and its value corresponds to how profitable the business is.
There are two ways to make money from shares:
- Increases in value: when you ‘buy low and sell high’. If a share rises in value above that at which you bought it and then you sell it, you make money.
- Dividends: most shares pay out ‘dividends’ four times a year. This is the equivalent of the way that bank accounts pay interest. If a share pays dividends of 3%, then quarterly you will get paid 3% of the value of the stocks you own.
Based on these two ways of making money from shares, there are two main types of shares that you can buy:
- Growth shares: are expected to grow more so pay less dividends.
- Dividend share: don’t necessarily grow as quickly so pay higher dividends.
To understand this, just know that dividends are paid by companies to entice you to buy their shares. If the company is growing strongly, then they don’t need to entice people as much so they usually pay lower or no dividends.
What types of shares should I buy?
Whilst this is a personal decision with personal factors coming into play, our recommendation is dividend shares. Dividend shares are lower risk and require less time and research. With dividend shares, you can do the bulk of your research before you buy them, choose the right shares to buy then sit back and monitor them casually as they pay their dividends and eventually sell them far into the future (or pass them on to your kids). Hence dividend shares are often like a bank account, but one of somewhat higher risk and volatility and hence higher ‘interest rates’. In fact, many of the safest dividend shares are the shares in the banks themselves.
Alternatively, growth shares are higher risk and require more time and research. They are more volatile—faster moving, so require more attention and research to make sure that they keep going in the right direction (upwards). Also, since the strategy with these shares is to sell them rather than keep them, this requires close monitoring and research to ensure that you sell them at the highest price possible. Growth shares require not only time and effort, but also a knowledge of the share market that is not held by most non-full time investors, and there are elements of the stock market in which non-full time investors are in competition with the full time ones, so for these reasons, growth shares are not recommended. We recommend investing in large, stable companies like the Big Four banks, telcoms, mining companies and building.
Index Funds, Managed Funds And Exchange Traded Funds
These ‘funds’ are where a bunch of shares are rolled together into an aggregate of their values that can be traded. They are valued for their low maintenance required and often for their security.
Index Funds are the most aggregated out of all of these. They are where a large index of shares are combined into a fund. An ‘index’ is like All Ordinaries which is the average of all the 500 largest companies in Australia. It’s a highly safe investment for this reason but unlike money in the bank is still susceptible to economic downturns. There are other indexes for shares from different countries and different numbers of shares. Most of them are very safe but there is still a large workload in the stage of purchasing them because the choice is; which one? There are many to choose from and this research can earn you a lot more money in the long-run. One of the most desirable features of all index funds is their low fees and this is because there are low managerial requirements in simply maintaining the same collection of shares.
Managed Funds are when an investment manager buys and sells shares and you invest money, along with other investors, in the investment manager. So basically, the manager buys and sells shares for you. This is attractive because it allows everyday investors to compete on the same level with professional investors. However, there are a few catches. Firstly, managed funds have high fees to pay the investment manager for their work. Secondly, managed funds are handicapped compared to individual investors because they must buy and sell shares as soon as investors opt in or out of the managed fund. So if a person withdraws from the fund, the investment manager must sell shares in the fund even if it isn’t the right time to sell, and the same for when people opt in to the fund. This creates large problems when funds become popular or unpopular suddenly and hence we are not giving managed funds a recommendation.
Exchange Traded Funds (ETFs) are like index funds however they can be more specific and complicated. They can track things like the price of certain metals, of certain industries, etc. Hence they have all the benefits of index funds but can be more risky and (if you do the research and buy the right fund), can provide more reward.
We recommend considering index funds and ETFs for low maintenance, simple, safe investments. However managed funds have problems that outweigh the advantages.