Future Focus: How to invest on a modest salary
There are ways you can invest, even if you only have a small surplus.
I’m taking a break over April and will be back to my regular Future Focus column on Wednesday, 8 May. I’ll be exploring Scotland, Morocco, and France - celebrating my husband’s birthday by ticking off some of his bucket-list golf courses along the way. Until then, we will release some of the most popular editions of Future Focus each Wednesday.
Do you feel like you can’t invest on your salary?
Last week I wrote about the challenges of the cost-of-living crisis in Australia. I explored the combined impacts of inflation and low wage growth. The depth of the impact has many political experts declaring cost of living to be the election decider.
Part 1 of this series took a deep dive into inflation’s impacts on your savings and investments. Part 2 will look at how to invest – not just to keep up with inflation, but to grow wealth.
What is a ‘modest’ salary?
This is completely subjective. It depends on many variables including your location and household expenses. For the purposes of this exercise, let’s assume that you are investing on a salary where you may only have $50-$100 a week spare. This was where I was when I first started investing.
Being able to continually invest over long time periods is the formula for building wealth. However, it is difficult to be able to afford the minimum investments for many investment products in the market.
I was lucky that I was in the financial services industry when I was starting out, with a small surplus available to invest. I understood which financial products I could use that would allow me to invest with small additional investments. Since then, the investment product industry has evolved. We see more Aussies interested in investing and more approaches available to support investors with lower balances. The industry has evolved to be more inclusive of lower balance investors.
There are some managed funds that require $500,000 initial investments. When you’re investing in listed equities (stocks and ETFs), there isn’t a minimum investment to do so, but brokerage is prohibitive for making small, additional investments. It wouldn’t make much sense for an investor to invest $50 in a share and pay a $5 brokerage fee. You’ve already lost 10% of your investment before the market has even moved.
If you only have a small amount to invest you have a few options to put your money to work. Getting your money to work faster is better than having it sit in a transaction account.
First, your foundations
Many Australians feel the urge to jump into investing after they see articles like mine. I like to focus my articles on the opportunity cost of not investing. It is a good way to get more people invest. In saying that, I also believe you are only doing yourself a disservice if you jump into investing without getting your foundations right.
I’ve written on how to do this here.
It’s also not worth jumping into products without doing your research first.
I wrote about the consequences of transitioning to a ‘grown up’ portfolio. My target audience was people that had jumped into investments without thinking about what might be right for them and then discovered the need to transition to a portfolio that actually serves them.
Understanding what you’re investing in and why will make you a more successful investor. It will limit poor behaviour as you are less likely to make poor decisions if you understand how your investments are connected to your financial goals. It will limit your tax paid – you won’t have to sell your initial investments and pay tax to transition to your new portfolio. You’ll save on transaction costs.
A little bit of work defining your goals and the types of investments you should be in will pay off over the long-run. Don’t feel discouraged if you do not have any financial goals yet. It is likely you do, and you just need a little help to dig them out.
Your hurdle rate
In part 1, I gave you a tool to figure out your personal inflation rate. This is what we’ll call your hurdle rate because it represents the rate that your investments need to beat to maintain and grow your money.
For example, my personal inflation rate is 2.95%. I can easily beat this at the moment in a savings account. However, that’s not always going to be the case.
Investing is the exchange of risk for return. In this context risk refers to volatility. Different asset classes carry different levels of volatility and therefore offer different levels of expected returns.
I often refer to this chart from Shane Oliver as it can help investors understand how the assets you choose largely determine the outcomes that you receive.
There are four main factors to think about when trying to beat your hurdle rate and grow wealth.
- Get invested
- Stay invested for the long-term
- Choose your asset allocation wisely
- Keep investing
The next section goes into the investment products and vehicles that you can invest in with smaller balances, but remember any investment is simply a means to an end.
Focus on those steps to grow your wealth and maintain your purchasing power.
Your superannuation
Many people forget about superannuation when investing extra money. You can start salary sacrificing your surplus and get a tax deduction as a bonus. Or, you can transfer your funds after-tax from your bank account. Most superfunds have no minimum additional investment cutoff so you can transfer small balances over whenever you can.
If you go down this path you still might be entitled to a tax deduction. If you have room left in your concessional cap, you can submit an S290 Form (A Notice of Intent to Vary or Claim a Deduction). The topper is you’ll get some tax back when you submit your tax return. Invest that too!
Platforms
I mentioned earlier that there are investment products designed to appeal to investors that might not have large parcels to invest. Vanguard and Betashares are leading the charge here with their investment platforms.
Vanguard Personal Investor allows investors to invest with minimum initial investment amounts of $200, and additional investments at $1 for managed funds, $200 for ETFs.
The platform allows you access to 40 Vanguard managed funds and 29 ETFs. This ranges from multi-asset, Australian shares, international shares, property and fixed interest.
Vanguard is well-known for their ultra-low fees, specifically on their passive investments.
Betashares’ Invest platform charges you no fees to invest in chosen ETFs or a select number of ASX shares. They have a minimum investment of $10. They provide exposure to Betashares ETFs, and a wide variety of ETFs from other providers. Investors are allowed as many buy trades as they like, but are limited to 3 sell trades a month.
Final thoughts
I think that every Australian should invest for their future. For many Australians, investing seems like a luxury given the struggles with cost-of-living increases.
Remember that most of us are already investors through our superannuation. If nothing else, help out your retirement by putting a few dollars in your super when you can. If you have the benefit of time, you will enjoy it growing and compounding in a tax effective way.
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