MONEY: $100 is all it takes to build wealth
According to finance guru Effie Zahos, putting aside $100 per week can boost your wealth and increase your success as an investor.
One of the keys to successful investing is to make a habit of it, regularly tucking cash away to get the benefit of compounding returns over time. Investing just $100 a week can see you accumulate $48,000 over 10 years – and over time, the returns your money earns do more of the heavy lifting to grow the balance. This assumes an average return of 6.5 per cent per annum.
Effie Zahos, money commentator at Canstar and Channel Nine’s Today, looks at five ways to invest $100 weekly for various life stages and goals.
#1 You have a home loan
Interest rates are at record lows, but tipping an extra $100 each week into your home loan is a low-risk investment strategy. Pay an additional $100 a week into a $400,000 mortgage with a rate of 3 per cent, and you can save up to $46,000 in interest over a 25-year term. Plus, those savings are tax-free!
To earn the equivalent of 3 per cent after-tax on another investment, you’d need to earn returns closer to 6 per cent if you’re a high-income earner, and it would involve taking on a lot more risk.
If you’re not convinced, consider this: to grow cash savings of $46,000 in a similarly low-risk investment like a savings account, you’d need to deposit $100 each week for the next 31 years. And that assumes a rate of 1 per cent, which can be a stretch right now, and usually involves meeting a variety of conditions to earn bonus interest. It makes extra mortgage payments a no-fuss way to get ahead – no complex tax records to maintain, and if you need cash urgently, simply redraw the funds out of your loan.
#2 You’re raising a family
Research by Futurity Investment Group shows parents can fork out anywhere from $82,000 to $340,000 to put their kids through 13 years of schooling, depending on whether you choose the public or private system.
Investing $100 weekly can help with the cost, and one investment option is an education bond. These work like a managed investment fund where regular contributions from parents and/or grandparents are pooled with those of other families. When you withdraw money to pay for school expenses, the bond provider can claim 30 per cent tax back on investment returns – a saving that is passed on to parents.
If you earn over $45,000 annually (meaning your personal tax rate is 32.5 per cent-plus), education bonds can be a tax-friendly option – less so if your income is below $45,000.
Education bonds do have some quirky features, including limits on annual contributions. Read the fine print to decide if this is right for you.
#3 You want to invest in property
Buying a rental property is going to be a stretch if you can only spare $100 each week. But you may be able to own part of a property.
Fractional investing is where the value of an investment property is divided across multiple owners via units, sometimes called “bricks”.
If a property’s value is divided into 20 bricks, and you buy just one brick, you hold a 5 per cent share.
Investors are entitled to their stake of the property’s net (after costs) rental income, and bricks can be sold at any time to access capital gains if the property has risen in value.
It makes fractional investing an indirect way to become a landlord,
and it’s available through the likes of BrickX and DomaCom. Be sure to read the product disclosure statements and get the full picture on all fees, as these can have a big impact – especially on smaller investments.
#4 You’re heading towards retirement
No matter whether you’re five, 10 or 15 years from retirement, it’s never too late to boost your superannuation, and investing $100 each week to your super savings can make a significant difference to your retirement lifestyle.
Let’s say that Susan, aged 50, has $159,000 in super – the average for a woman her age. She plans to retire at age 67. By contributing $100 weekly to super from her own pocket, Susan’s nest egg can grow to $436,000 by age 67 – up from $326,000 if she relies solely on her employer’s 9.5 per cent contributions. That’s an extra $110,000 to spend in retirement.
Alternatively, Susan can ask her boss to salary sacrifice $100 each week into super from her before-tax income. This would see her final super balance reach $420,000 at age 67. That’s less than if she makes after-tax contributions because salary sacrifice contributions are taxed at 15 per cent.
The upside is that salary sacrifice is a tax-effective way to grow super, and your take-home weekly pay may drop by just a small amount, leaving you more to spend now compared to growing your super using after-tax money. The super calculator at the Moneysmart website is a helpful tool.
#5 You like the idea of sharemarket investing
Shares can be a great long-term investment. The downside is that you need at least $500 to start trading shares directly. But there is a way to get into the market with less.
Micro-investing apps like Raiz and FirstStep let you grow sharemarket investments with very small sums. You choose how you’d like to invest from a selection of ready-made ‘portfolios’ chiefly made up of various exchange traded funds (ETFs) – low-cost managed funds listed on the ASX (Australian Securities Exchange).
Along with the fees charged by the underlying ETFs (which are typically below 0.5 per cent annually), microinvestment apps charge their own ongoing fees. Raiz costs $2.50 per month ($30 annually) on portfolios below $10,000. FirstStep charges as little as $1.25 per month ($15 annually) for accounts under $5500.
Micro-investing doesn’t let you own shares directly – you’re putting your money into a fund managed by the micro-investing platform. However, you can still expect to earn returns and withdraw your cash any time.
If your heart is set on owning shares in your own name, you’ll need to save $100 each week until you have the required $500, then repeat the process to grow a diversified portfolio. The problem, though, is brokerage fees as they impact your overall returns. AWW