Before you invest
Before you start investing, it's important to follow the foundational practices of wealth creation. In the pre-investing stage, focus on lifting income, minimising expense, stabilising debt and growing a safety buffer.
A good rule of thumb is that if you're not saving 20% of your income, you're not ready to start investing.
Track income and expenses
Understand where your money comes from and goes to. Create a budget and monitor your spending patterns.
Set realistic financial goals
Set some realistic financial goals for the short- and long-term which you can work towards. This might include negotiating a pay rise, finding a new job or reducing your discretionary spending.
Cover your essential expenditure
Ensure you can cover your essential expenditure including housing, food and utilities.
Build an emergency fund
Life and investing are risky endeavours. Your aim should first be to have a cash buffer to cover unforeseen expenses like job loss, car breakdown, or injury, so that you are not forced to sell your investments. A good cash buffer is around 3 to 6 months of expenses.
Pay down consumer debt
Pay off any debt, starting on those with the highest interest rate first, until you've paid off every loan that has an interest rate higher than what you'd like to get as a return on investment (e.g. 7%). Examples of this kind of debt include credit cards, payday loans, buy now pay later, personal loans and car loans.
Improve your personal income
One way to increase the amount you can invest is by increasing your personal income. Think of it as your first investment: investing in yourself. Ask for a raise, or take a course so you can get a higher paying job.
Save for a home deposit
If you're wanting to buy a home, save for a deposit before you start investing.
Maximise concessional superannuation contributions
Besides simply increasing your concessional superannuation contributions, you may be able to use the carry-forward rule to make additional contributions up to the unused cap amounts from previous years. You might also wish to consider contributing to the superannuation of your spouse, if your partner is not working or is earning a low income.
Investing
When you begin investing, the most important factor is being able to make decisions when the time is right for you. Your circumstances are unique to you, and so it's important to personalise your financial strategy to your situation and your goals.
Determine your investment strategy
Your investment strategy should match the level of risk you're willing to take on, your return goals, and average expectations. Ensure that, whatever you invest in, your portfolio is diverse. Reduce your exposure by investing in different markets and assets, such as Australian equities, international equities, bonds, credit and real estate.
Minimise costs in your investment strategy and structures
Use advisors when you need advice, but not all the time, so that you don't spend a significant portion of your assets on services. We have tools available to help you manage what you are comfortable doing yourself. Focus on index funds and low-interest debt.
Minimise tax on your investments and structures
To minimise tax you need to pay, consider strategies such as debt recycling, self-managed super funds, family trusts, and corporate beneficiaries.
Targeting an extra 1%
Over 30 years, an extra 1% per annum saving in yearly costs means you have greater than 30% more wealth for you and your family. When you need to withdraw money to live off your investments, 1% can be the difference between going bankrupt or leaving a legacy.
Imagine you are living off $2M of investments, withdrawing 100k a year for expenses which increase by 3% each year with inflation.
A 10% return on investment is a great result. But after advisor fees and taxes, 10% could drop to 6%.
Over a 40-year period, if you had only returned 6% after tax, you would be bankrupt. At 8% you have more than tripled your money.
Without taking additional investment risk, you can reduce your costs and tax to achieve 8% after tax.
The impact of +1% return over 40 years
6% after tax
Final: $0
Runs out year 32
7% after tax
Final: $668k
8% after tax
Final: $6.5M
How Self Managed helps
We provide free access to tools and guidance to help you improve your after-tax returns.
Track your money
Free access to automatically categorise and track your income, spending and investments.
Investment strategy
Free access to information about asset types and performance so you can choose investments that match your risk and return objectives.
Minimise costs
Free access to guidance on reducing cost of debt, fees and transaction costs.
Minimise tax
Free access to our guides for tax minimisation. (This kind of information is usually only available to wealthy people through financial advisers.)
Structure management
Free access to Trust and Company creation documents and templates to help you manage your structures going forward.
Tax preparation
Our tax platform simplifies your tax preparation and allows you to submit your trust and company returns directly to the ATO.
References and further reading