In America it’s all about topping up your 401K or Roth accounts, matching employer contributions and the like. In Australia it’s superannuation and salary sacrifice. We all know that the sooner you start contributing the better off you’ll be in the long term but life can thrown a curve ball or two and keeping all your investments in super is not always the wisest or most profitable choice.
Life is unpredictable. It’s impossible to tell when you’re going to need extra access to your funds tomorrow or in forty years and if you’re topping up your retirement funds and neglecting other investments you might be doing yourself a disfavour. Retirement may be a tax effective saving strategy but you don’t know where you’re going to be financial in 5 years let alone 20 or 40. So why put all your eggs in just one basket?
Whether you’ve just entered the workforce or have been at it for several decades you still need investments that you will have access to should the need arise. An emergency fund is great, so is having trauma, TPD and income protection insurances in place, but an investment portfolio outside of your retirement savings can add to your nest egg.
By all means top up your retirement savings, compound interest is magical and the sooner you get started the better off you’ll be. But if you also want to enjoy the fruits of your labor before you’re too exhausted to make the most of them, there are other investment vehicles worth considering.
The benefits of owning managed funds include having someone else make the investment decisions for you in terms of which companies to invest in and being open to a variety of products from Australian and International markets to fixed interest, property and cash.
If you opt for managed funds, find one that has no entry or exit fees and low management fees. You can begin your investment portfolio with as little as $5000 and then contribute even just $100 per month via BPay. Reinvest any dividends the fund might pay and after ten years of solid investing you could have a substantial sum. Vanguard funds are very popular in both Australia and America. Just remember to do your own research.
Investing in the share market is probably one of the riskiest investments you can make other than not investing at all, but the gains can be significantly higher than if you were to keep your money in a savings account. While you’re unlikely to beat the index, investing in quality companies that pay dividends can provide you with passive income.
When purchasing shares look for companies that have a good track record, low debt levels, good income, and a prospective future. You can also opt for index funds and purchase them directly on the share market that way you’re exposed to the market as a whole rather than a few individual industries.
With shares you pay a brokerage fee when you buy and when you sell at a percentage rate of the purchase price while online trading through Commsec or Etrade will set you back around $19.95 per trade. Remember, in Australia, if you hold shares for over 12 months you get a 50% discount on any CGT payable. So if you purchase $1000 worth of ANZ shares and sell for $1500. Your profit is $500, if you’ve held onto the shares for over 12 months you’ll only be paying capital gains tax on $250.
Add money to your mortgage and you will save in interest more than you would make in a savings account. If you have a 30 year $300,000 mortgage at 6% interest, your monthly repayments will be around $1800. Pay an extra $50 per month and you’ll pay off your loan 2.2 years faster and save yourself almost $30,000. An extra $500 per month can save you over $160,000 and 12.4 years of loan repayments. A paid of mortgage gives you a loan free asset down the track that should you require, you can sell. In Australia your primary place of residence is CGT free which means $0 tax on any profit you might make whether it’s a dollar or a million.
Have you considered being a landlord? Property investing can be a great tool to increase your wealth right now. If you buy the right property with the right potential you could make big bucks within a few months or better still hold it long term while the tenant and the tax man pay off the mortgage.
Purchasing an investment property is a little different to purchasing your own home. It’s vital to take your emotions out of the equation and make your decision on the basis of the sums. It should be a sound business decision and result in profits from day one whether it’d be through cash-flow or equity. While any interest and expenses that go towards owning your property are tax deductible you should still aim to reduce the loan principal as quickly as possible to maximise your gains and eliminate debt.
Investing outside of your retirement nest egg can give you options throughout your life should an emergency or opportunity arise. Having the extra asset beyond your emergency fund and your retirement savings will ensure that you are prepared for the unexpected, regardless of whether it’s an opportunity or an emergency.
Do you invest outside of your retirement account? Which investments are your favourite and why?
*Please note the opinions in this article are my own and are for informational and entertainment purposes only. Make sure you consult your financial adviser before making any financial decisions.