Kylie Purcell* reports on the age-old conundrum of determining whether to save or invest.
Say you’ve saved up a decent pile of cash or you’re trying to plan for your financial future, how do you decide when it’s the right time to invest?
With interest rates at record lows, analysts say there’s never been a better time to move funds from under-performing bank accounts into investment products.
But according to financial adviser Sarah King, who works for investment app Stockpot, it depends on what your goals are and the time frame you need to achieve those goals.
While saving refers to stashing cash in a bank account, investing sees cash exchanged for another financial product, such as stocks, property, managed funds or bonds.
“When you’re looking to save, it’s really to fund your shorter terms goals, so anywhere between three months to three years, you’re usually saving to fund some lifestyle expenses,” King told Trading Day.
While it’s important to have enough cash flow for day-to-day expenses and short-term goals, keeping too much cash over a long period of time means missing out on the chance to invest for more.
When is the right time to invest?
King says the first step is to work out what your long and short-term goals are.
That will help you work out how much cashflow you need and how much can be locked away in investment.
“We don’t have a crystal ball and we know that we don’t know what markets are going to do tomorrow, so the best thing you can do is just start,” King advised.
Instead of trying to time the market, she says a good time to think about investing is when a person has been able to store away some excess cash-flow.
If there are short-term goals, such as a wedding or holiday within the next two to three years, a term-deposit is a good option. For anything longer, King says you could look at more advanced investment options.
“It doesn’t mean that you have to put all of your money in from day one. You can…drip feed your money in over time. That helps you avoid that fear of if the market were to drop tomorrow,” King advises.
She adds that if there’s any high-interest debt, that should be paid off first because those rates will outweigh the benefits received from investing.
How much do you have?
What you do with your money depends on how much of it you have to play with after living expenses are out of the way, according to NAB director of investor behaviour Gemma Dale.
However, the good news is that you no longer need a big chunk of money in order to start investing as you did 20 years ago.
Dale says a couple of decades ago, an investor would need around $5,000 minimum to get started investing in stocks and fees were higher on average.
Today, you can get started with just a few hundred dollars.
“Even if you only have a relatively small amount, so less than $1000, you can start investing… things are now so much cheaper and easier than they used to be,” she said during the same segment.
If you only have a small amount of capital, that rules out property investing, but stock market products and funds are still on the cards.
“The critical thing is you don’t want to be eating up your entire capital with fees or brokerage costs,” she adds.
However, Dale warns, when it comes to investing a smaller amount in stocks, you probably want to allow at least five years for that money to be locked away.
For a shorter time-frame of three years to five years, King says a ‘defensive’ ETF that consists of gold and bonds is a good option to avoid any major market swings.
Tax benefits of investing
Keeping money in the bank delivers a lower return on investment, but it also means you don’t get any of the tax benefits from investing in Australia.
“You get zero tax benefits from [saving cash] so every dollar you earn is taxed at your personal marginal tax rate. That’s not great fun, particularly if you’re a high-income earner,” Dale says.
In Australia, investors enjoy generous tax concessions such as negative gearing, franking credits and the capital gains tax discount.
That makes it harder for people trying to save up shorter-term high-capital goals, such as property.
Despite this, Dale says people shouldn’t be investing purely for the tax benefits.
“The critical thing I would say is that legislation changes all the time…If things change, you may find yourself in a difficult situation that you want to get out of.”
“It’s lovely to get the tax benefits but please look at the asset you’re investing in and know you would invest in it anyway, even without those tax benefits.”
* Kylie Purcell is Senior Digital Journalist with Your Money. She can be contacted at ww.yourmoney.com.au.
This article first appeared at www.yourmoney.com.au
