Okay, so you’ve heard about investing and want to give it a go. When is the time to start investing? If you read below you’ll find out exactly when and why.
When Not to Invest
There are certain points in life when you should not be investing. The most important one is arguably when you are in bad debt. This doesn’t include a mortgage, but includes other debts such as personal loans, car loans or credit card debt. Your number one priority in these situations should be to smash down these debts. The interest on these loans is definite, and to achieve returns in investing that outweigh this interest would be difficult or near impossible. As an example, if you have a credit card debt with an interest rate of 20%, your investments would need to also be getting a return of 20% just for you to break even. Unless you are an expert investor or very lucky, these returns consistently aren’t likely. So if you have any of these debts, focus on getting rid of them first before investing.
Another reason not to invest is if you will need the money sometime in the next five years. Investing is for the long term, and the shorter you keep your investments the more risky they are. So if you have a house deposit that you are wanting to deploy in the next 1-4 years, keep that baby safe in the bank. It might seem tempting to put your deposit into the share market as the returns are much higher than the bank, however if there is a downturn when you are trying to withdraw it you could have much less than what you started with.
Lets use an example.
You had $50,000 in the Vanguard Australian Shares ETF (ASX top 300) at the start of February 2020. The market had a good year in 2019 and had a good start to 2020, so your initial investment would have grown. You would be feeling pretty good with $50K as a deposit and you found a house you liked, planning to withdraw that money at the start of April to buy a home. Then Coronavirus hit, and it hit hard. The 20th February 2020 signified the start of the biggest stock market downturn since the global financial crisis in 2008. Suddenly your $50k deposit at the start of February is now worth only $36k at the end of March. You have lost $14k in a month, with the plan to withdraw that to buy a house at the start of April.
A 5 year price performance of the Vanguard Australian Shares ETF. You can clearly see the large coronavirus downturn at the start of 2020.A 10 year price performance of the Vanguard Australian Shares ETF. As you can see the lowest point of the downturn had erased the last 7 years of gains in a very short time period.
This is obviously an extreme example, and these massive market crashes tend to only happen once every 10 years or so, however it does teach an important lesson. If you plan to use the money in the short term keep it safe. If you aren’t in need of the money, then its worth investing. By looking at the graphs above you will see that the market bounced back really quickly and today we are already at all time highs.
When to Invest
Once you have all your debt cleared, you have an emergency fund, and you have some money left that you don’t need in the immediate future, you are ready to invest! To get started you will need to find a broker and find some investments that interest you. There will be more posts in the upcoming weeks explaining how to choose a broker and get started. However, if you feel like you want to get started ASAP please email me at mindovermoney@outlook.com.au or DM me on Instagram @mind_over_money_ and I’d be happy to get you started.
Struggling to make ends meet? Drowning in debt? Feeling like you can’t go out and enjoy life without spending all your money?
Check out the tips below to improve your cash flow and start saving money!
1. Reassess your saving habits
If you are struggling to save at all, the first step is to see where you are going wrong. Print out the last three months of your bank statements and try to see where all your money is going. Sometimes you don’t even notice how much you spend on things until you actually see it in writing! Try and categorise each of these expenses. Some examples of categories would be groceries, bills, rent/mortgage, car expenses, eating/dining out etc.
2. Look to cut discretionary and fixed expenses
Once you have worked out where your money is going, look to try and cut down on any costs you can. First costs to look at are your discretionary costs, which include categories such as shopping, entertainment, eating out and so on. These will be the easiest to cut out and should be your first focus. A way to make this interesting is to create a challenge for yourself, for example try and go a whole week or month without eating out! Even better, to keep yourself accountable tell other people you are trying this challenge and to keep yourself honest. You still need to have some fun, so some discretionary spending is important. While these challenges are good for the short term, you don’t want to restrict yourself so much that you eventually crack and go a bit crazy on the spending. This can lead to even more spending if you hadn’t restricted yourself in the first place!
Once you have cut down on your discretionary spending, its time to focus on your fixed expenses. These are expenses such as your housing costs, bills, insurances etc. If you have a spare room free at home, maybe you could rent it out to save on your rent or mortgage and bills. Maybe it is worth shopping around to find a better home loan rate, or phone company, or insurance company who will give you cheaper options. Even if you call up your current providers and suggest you may leave, they could offer you a better deal. While this can be a bit of a hassle to begin with, it could save you a lot of money in the long run.
3. Have a separate card for spending
The most useful way to control my spending I have found so far is to give myself an allowance each week and put it onto a separate card. This way, I only have a set amount of money to spend each week and I can’t go over that amount. If I have money left over at the end of the week I either transfer it to my savings or treat myself the following week. This spending card is the only one I have on my google pay so I am less likely to use it for impulse purchases. If I do need to make a bigger purchase I will take my card for my everyday account to use.
4. Find a way to earn more money
There are only two ways to increase your savings rate- spend less or earn more. You can only cut your expenses by so much so eventually the only other way to save more is to earn more. It might be worth having a meeting with your employer to see if you can get a raise, or work towards one. Finding ways to add value to the business you work for is probably one of the best ways to earn a raise.
If a pay rise isn’t an option, you could look outside your primary occupation. Are there things laying around the home you haven’t used in a year or two? Maybe look at selling it on Facebook Marketplace or Gumtree. Have time to get a second job? Look at picking up some extra hours on weekends or after work at a café or restaurant. You could even try and pick up some babysitting or dog sitting on days off. Also, apps like Hire Up and Air Tasker can be great for picking up work for a couple of hours at a time, at a good hourly rate.
5. Don’t go into debt, or if its too late, get out of it
Debt is a major dead weight when it comes to saving. Things such as credit cards, personal loans and car loans have high interest rates that make it a tough slog to get ahead. Prioritising paying these off will allow you to get rid of this weight and get your money sorted sooner. It is not until you pay all of these bad debts off that you should start investing and setting yourself up for the future, so the sooner you pay these off the better.
If you have multiple debts, aim to pay off your smallest debt first and start with a win early. Celebrate the small win and then move on to the next biggest debt, and so on, until all your debts are paid. Once you have paid these off you can work on building your emergency fund so you won’t need to go into debt again. Erasing these debts will free up your cash flow and help you get out of the pay check to pay check cycle.
Paying off debts from smallest to largest is also known as the “Snowballing Debt” strategy
Summary
Getting out of the pay to pay rut is hard, and is going to take sacrifices. Ask a friend or family member to try and be more frugal with you, to hold yourself accountable. Make it a competition even to see who can save the highest % of their pay. Doing these 5 things should help you to become a better saver and get you out of the pay check to pay check grind.
It is important to keep in mind that if you are able to increase your income or cut down on those fixed expenses, the extra money left over is going into savings or into paying off your debt. If you don’t feel confident that you can follow these tips or want some accountability, feel free to reach out and I’d be more than happy to help.
At the time of writing, the Reserve Bank of Australia (RBA) cash rate is currently sitting at 0.10%. This means it is extremely cheap for banks to borrow money, and they have passed this cheap rate on to mortgages. Mortgages are at an all time low also, and while this is great for home owners, it isn’t great for those with savings in the bank. Cheap money for banks means they pass on low savings interest rates, which are currently all around 1%. Inflation is also sitting around 1%, which means your money isn’t growing at all as it is not beating inflation.
A way to overcome this is to invest! The stock market does not rely on the RBA for its returns, instead the returns are made by mostly large, well performing companies. Investing in these reliable, strong companies means not only can you beat the banks and beat inflation, but your money can continue to grow every year.
Examples of companies you can invest in:
2. Grow Your Money
Ever heard of Compound interest? Some say it is the eighth wonder of the world. Investing allows you to use this compound interest to your advantage and rapidly grow your money. Compound interest is the interest that is calculated on the initial, principle amount and the interest you have already earned. In other words, you get interest on your interest, which means compound interest can exponentially increase your savings.
For example, if you had $10,000 in your investment account gaining 10% interest per year, at the end of the year you would have $11,000. If this money again earned 10% it would be based on the new number $11k, therefore at the end of the second year you would have $12,100 and so on. Here are some investing examples from the Money Smart Compound Interest Calculator to show you how powerful compound interest can be over time.
If you started with $1000 in your bank, adding $100/week with 1% interest per annum:
You can see by the results, in ten years you have only accumulated $2770 in interest.
If you started with $1000 in your investment account, adding $100/week with 8% interest per annum:
You can see by the results, in only 10 years you would have accumulated $28,496, more than half of your initial investment.
What if we were to continue this same savings rate of $100 a week with an interest rate of 8% but over forty years?
The results speak for themselves. In forty years your regular deposits of $208k would accumulate $1.33 million of interest
As you can see by the graphs, the more time compounding has to work, the more powerful it becomes. The last graph demonstrates that consistency is one of the most important parts of investing and will help you grow your wealth exponentially if you stick with it over the long term.
3. Speed Up Your Savings for a Long Term Goal
Have a goal of buying a house in ten years time or longer? Investing may be a way to dramatically increase your deposit. With an average return of 8% per annum, investing in the Australian share market could really help grow your savings, faster than any term deposit could.
Using the Money Smart Compound Interest Calculator can help to show you how much your deposit could grow by if invested. If you left your $50k deposit in the bank for ten years at an interest rate of 1%, you would have approximately $55k at the end of the 10 years. If you left your $50k deposit in an investment fund for 10 years that grew at 8% per annum, you would have approximately $110k saved! Both of these is without contributing any extra money to that initial deposit.
I’ve attached a link to the calculator at the bottom of the page, feel free to have a play around and see how much you could earn. Keep in mind that this should only be if planning to use your investment in ten years time or later, as investing should be for the long term.
4. Provide an Additional Income Stream
Another great reason why you should invest is that it can provide you with a passive income, meaning you can be getting paid while you sleep!
Many companies distribute “dividends” which is a payment made by the company to you, the investor. These can come quarterly, half yearly or yearly and provide a great additional income stream. If you have heard the term “self funded retiree” before, this is who they are referring to. Self funded retirees will invest in assets that pay high dividends, and they then use those payments to live. You can also do a similar thing with property investing, and support yourself using the rent people pay you. The more you build up these assets, the larger the income will become. If your asset base is high enough, you would be able to fully fund your lifestyle, without a job. This leads to the next point..
5. Retire Early
If you can build up a passive income large enough to cover your expenses, you can retire! And you can retire without needing to access your super, which means it will be before you are in your mid to late sixties, giving you time to do what you like. Whether that’s relaxing, travelling, or even still working but doing something you love and not something that pays well. This passive income opens up a range of doors and offers you freedom.
There is a financial movement out there called FIRE (Financial Independence Retire Early) who work hard early to achieve this early retirement or freedom. Most of them will live quite frugally and funnel any extra savings into their investments, until they have enough passive income to cover their expenses. While the movement name includes the words “retire early”, many do continue to work but focus on passion projects or things they would do for free anyway, as the money is no longer important. Some people in the FIRE movement retire as early as their early 30s, however their 20s is spent living very frugally and investing as much as possible.
While I think there are some great concepts to take away from this movement, I believe life is there to be enjoyed and you are never promised tomorrow. Therefore, spending my 20s working non stop and living off rice and beans just isn’t my thing. However, being mindful with your money and investing early for the long term is a great attitude to have and one I encourage.
Summary- Why do I Invest?
I invest for probably all of the reasons above. I want to have choice later in life so I am trying to work hard now so I can enjoy life in the future. I am not as hardcore as some of the FIRE movement, I live far from frugally. However, I am mindful of what I spend and do try to put a regular amount away per week for future me. I am trying to do this early as the more time my money is compounding the more it is going to grow. I am a travelling fanatic and I would one day love to buy myself business class plane tickets to a destination. That’s just one of my bucket list items and investing will help me get there. Having a passive income will also provide the flexibility for me to continue to travel later in life and keep doing what I love doing.
When COVID-19 hit in March last year it wreaked havoc in most peoples lives. I was living overseas at the time and had to book a last minute flight back before I got locked out of the country. Many people lost their jobs overnight with travel, hospitality, gyms and many other services being forced to shut down. Those that had cash savings were much better off in this situation as they were able to pay their bills until job seeker/keeper arrived. Those that didn’t have savings may have struggled to survive this period. So what is the biggest lesson we learned? How valuable it is to have a cash buffer, or what I like to call an emergency fund.
What is an emergency fund and why should I have one?
An emergency fund is exactly that, a fund for emergencies. COVID-19 has only highlighted that things can change in an instant and what we thought was permanent and safe can be quite the opposite. This is why its important to have a cash buffer in our lives so if things do go downhill quickly we have money we can use and we don’t have to resort to loans. Most information you read will suggest three months of living expenses, which if you don’t know how much that is for you it’s definitely worth figuring out. Some people might want six or even twelve months of expenses in their emergency fund to feel safe. The important part of an emergency fund size is that you feel comfortable with it and know that it is there if you need it.
Me living it up in British Columbia, Canada, about two weeks before COVID-19 ruined everything
What does three months of expenses mean?
When we are talking about expenses, we aren’t talking about three months of total income. What it means is how much would it cost you to live for three months. This includes all mortgage/rent costs, bills, food, going out, entertainment etc. The idea is that if you were to lose your job tomorrow you would be able to live the same way using this fund for three whole months, giving you plenty of time to find another income without being stressed about where your next meal will come from. For me, I like to have about three to six months of expenses saved at all times. This generally fluctuates from time to time but at a minimum I keep three months worth of expenses.
Expenses
$Amount/month
Mortgage/Rent
1000
Bills/Subscriptions
500
Groceries
400
Health related expenses
200
Entertainment/going out/Holidays
500
Vehicle Costs
200
Debt repayments (CC’s, personal loans etc)
300
Other
200
Total Expenses
3300
This is an example of how you could work out your total expenses for one month. In this example the total expenses for one month are $3300. If the goal was three months of expenses in your emergency fund you would need roughly $10, 000.
If you don’t know how much you spend per month I would suggest going through your bank statements to get a rough idea of your expenses. I like to overestimate mine so I have a nice healthy emergency fund.
What isn’t classified as an emergency?
Clothes
Holidays
Something that you ‘want’
What is classified as an emergency?
Unforeseen bill
A burst water pipe
Medical emergency
Car broken down
Summary
If you have to dip into your emergency fund for an emergency, don’t stress. It is there for us to use in emergencies and there shouldn’t be any guilt associated with that! If you find you are dipping into your emergency funds for ‘non-emergencies’ it might be worth setting up this fund with a different bank. You will also want to make sure it does not have a transaction card linked and you don’t have access to it on your phone through internet banking. This way, it will be more difficult to access it and spend on a shopping spree. If this still isn’t enough to keep you from spending the money, it might even be worth getting an account that requires a joint signature so you can’t get the cash out on your own.
My name is Maddy, I am 25 years old and I am currently living in Mount Gambier, South Australia. I have been working as a paramedic for the last 4 years, and while I love my job, personal finance and investing is my real passion. I help people during emergencies at work daily, and I have created this blog to hopefully help people in their money lives as well.
A picture of me saving a very cute patient, Toby.
I will be covering all things money, including fundamentals of personal finance, investing both in shares and property, and other topics that are trending in the finance world. I can’t wait to start spreading my knowledge and hopefully influencing people with their money for the better.
If you are living pay check to pay check, can’t seem to save, or want to begin to invest but have no idea where to start, you have come to the right place! My posts will be covering all of this and more so subscribe, follow me on Instagram and get ready to learn.
If there is anything you want covered specifically please reach out by commenting below or contacting me through the details found on the contact page.
Mind Over Money 