Stock market / investment - what to do with small savings

[Daly87]

Hi there,

I have been saving some funds for the past two years with no real idea or plan what to do with it. I have saved $50k, play money for some on here I assume but a lot to me. I live in central Sydney earning around $110 as an engineer, so housing is out of my reach for where I currently want to live. And no, dont want to move to a cheaper suburb as I LOVE where I am.

As the 'high interest' bank accounts are a measly 2.5% I have been thinking of investing in stocks. This is very new to me and I am still struggling to get my head around them but my initial research is leading me to Vanguard Index or diversified ETFs. This seem 'safe' as opposed to investing in companies that needs me to understand the company values, board of directors, business models etc etc.

Is there any experienced members on here that would like to offer their 2c? I am not asking for any sure tips or information but more a discussion on how others have approach the subject as newbies and how you grew.

I should point that I am looking long term, retirement type investing (I am 30yo) not buy low sell high day trader investing.

I am also interested in how to understand and calculate dividends returns, is it possible to earn a reasonable retirement income  with dividends from investing now?

 

[Troubleshooter]

Well done, a nice little 50k nest egg - DON'T BUY TESLA STOCKS?

[Lucky Phil]

Hi.  Couple of questions first?

Do you wish to access he funds and or interest or just have them sitting there locked away until you are 60+?

Do you have super fund?  Self managed or through your employer?

Do you want some money to spend every six months with your initial investment locked in and fixed, or are you ok to make some money to spend every six to twelve months but not worried if the $50K goes up and down in value?

 

[Jason E]

If you are truly talking "long term / retirement" type stuff, are you maxing out your super contributions up to the 30k mark per year?   The younger you start this the better you'll be at the other end,

That would be the safest (depending on your fund) investment strategy for retirement with the best tax incentives.  I am able to Salary Sacrifice my contributions which assists as well.  As long as you are in a low cost/ low fee fund (I am with Q Super as a Qld Government employee) & not a bank fund or "for profit" fund that usually has higher fees & lower returns.

I get a higher employer contribution (as I have to retire at 60) than your normal 67 retiree so this may change some of my applicable experience.  No doubt there will be some on here that really know what they are doing & will give smart advice. 

Best of luck.

[Dreamr]

Everyone has a different opinion on where / how to invest .... not saying I'm right or wrong or anyone else is but I'll share what worked for us ...

Real estate ...

Buy in areas that are closer to major cities and will still experience growth but haven't seen the stupid prices of the cities yet ...

For example ... It's still possible to buy property on the Central Coast between $450k - $550k. Those same properties 2 years ago were $350k ..

Real estate is proven ... it has it ups and downs like any other investments, but over time it's proven.

I don't understand the stock market, nor do I want to .... my wife and I don't have any Super or contribute to it in any way ... it's just not for us ... our real estate portfolio will support us and provide all we need in retirement ...

Different strokes for different folks ... You just have to find the one that's right for you ... 

[Daly87]

3 minutes ago, Lucky Phil said:

Hi.  Couple of questions first?

Do you wish to access he funds and or interest or just have them sitting there locked away until you are 60+?

Do you have super fund?  Self managed or through your employer?

Do you want some money to spend every six months with your initial investment locked in and fixed, or are you ok to make some money to spend every six to twelve months but not worried if the $50K goes up and down in value?

 

I don't have any near future desire to access the funds, quite happy to have it sat there and honestly the harder it is to access the better. Money sat there forms a burning sensation in my pocket that needs to be extinguished (spent).

I do have a super fund, with AustralianSuper... I do absolutely nothing with it for fear of messing it up.

I am not sure I understand the direction of the third question. I guess I would rather not have the initial investment fixed - as that doesn't get me very far in the future? I am also not too worried about it fluctuating as far as long term investments are concerned I expect that to happen a bit over the years. Making money to spend doesn't concern me right now, I live very well and still putting money away so if there any money I earn I would most likely put it back into the investment. What I never had I will never miss...

2 minutes ago, Jason E said:

If you are truly talking "long term / retirement" type stuff, are you maxing out your super contributions up to the 30k mark per year?   The younger you start this the better you'll be at the other end,

That would be the safest (depending on your fund) investment strategy for retirement with the best tax incentives.  I am able to Salary Sacrifice my contributions which assists as well.  As long as you are in a low cost/ low fee fund (I am with Q Super as a Qld Government employee) & not a bank fund or "for profit" fund that usually has higher fees & lower returns.

I get a higher employer contribution (as I have to retire at 60) than your normal 67 retiree so this may change some of my applicable experience.  No doubt there will be some on here that really know what they are doing & will give smart advice. 

Best of luck.

I am not maxing out my super contributions just yet. I have only just found out about this incentive ( don't laugh but I found it out by reading the bare foot investor haha)
I am with AustralianSuper - not sure how they rank in terms of high/low fees. looking into comparisons now.

thank you both!

1 minute ago, Dreamr said:

Everyone has a different opinion on where / how to invest .... not saying I'm right or wrong or anyone else is but I'll share what worked for us ...

Real estate ...

Buy in areas that are closer to major cities and will still experience growth but haven't seen the stupid prices of the cities yet ...

For example ... It's still possible to buy property on the Central Coast between $450k - $550k. Those same properties 2 years ago were $350k ..

Real estate is proven ... it has it ups and downs like any other investments, but over time it's proven.

I don't understand the stock market, nor do I want to .... my wife and I don't have any Super or contribute to it in any way ... it's just not for us ... our real estate portfolio will support us and provide all we need in retirement ...

Different strokes for different folks ... You just have to find the one that's right for you ... 

Yeah that has been on my radar, 'rent-vesting' as they coin it. I was all for it but honestly getting a little spooked with all the noise about a potential crash, interest rate hikes etc. For the uninitiated (like me!) it all seems very doom and gloom if you already haven't created $x00,000s in equity from the most recent boom.
Brisbane middle ring houses were what I was looking into, specifically lawnton-kallangur area for the upcoming university development.

[Stew F]

39 minutes ago, Troubleshooter said:

Well done, a nice little 50k nest egg - DON'T BUY TESLA STOCKS?

Did you say Tesla, or Telstra? or both.  Mind you, if you're looking long long long term, telstra, at $3.18, isn't a bad deal.  They're never going to go broke.

[Troubleshooter]

Only Tesla, Telstra doesn't have boy wonder Barnum at the head, they are a safe keeper....

[TwoHeadsTas]

49 minutes ago, Jason E said:

If you are truly talking "long term / retirement" type stuff, are you maxing out your super contributions up to the 30k mark per year?   The younger you start this the better you'll be at the other end,

That would be the safest (depending on your fund) investment strategy for retirement with the best tax incentives.  I am able to Salary Sacrifice my contributions which assists as well.  As long as you are in a low cost/ low fee fund (I am with Q Super as a Qld Government employee) & not a bank fund or "for profit" fund that usually has higher fees & lower returns.

I get a higher employer contribution (as I have to retire at 60) than your normal 67 retiree so this may change some of my applicable experience.  No doubt there will be some on here that really know what they are doing & will give smart advice. 

Best of luck.

You don't need to Salary Sacrifice anymore to get the deduction for super if you are a salary & wage earner.  The 10% rule was abolished on 1/7/17, so (virtually) anyone can contribute to super and get a tax deduction up to the maximum 25k total contribution limit.  You just need to advise your super fund you wish to claim a tax deduction, and they will send you back an acknowledgement, and deduct the 15% contributions tax - note, compare this rate with your own marginal tax rate to understand the benefit of doing this.  This is very useful if you, for example, make a capital gain towards the end of the financial year and can then dump money into super to offset the gain, whereas it may otherwise be too late to salary sacrifice to get the same effect.

 

1 hour ago, Daly87 said:

As the 'high interest' bank accounts are a measly 2.5% I have been thinking of investing in stocks. This is very new to me and I am still struggling to get my head around them but my initial research is leading me to Vanguard Index or diversified ETFs. This seem 'safe' as opposed to investing in companies that needs me to understand the company values, board of directors, business models etc etc.

 

I have some of my super fund monies invested with LaTrobe Financial, which pays 5.2% interest, and another swag with Vanguard International Shares ETF (VGS) which gives me international exposure without direct investment.  Happy with both of those, would otherwise be happy to look at an ETF or LIC for ASX exposure if I didn't have direct share investments.

[Lucky Phil]

Ok here is what I would do.

The key to investment in diversification.

You have five things going for you at the moment.  

1. A super fund

2. $50K savings.

3 You are 30 yo

4 Good income

5 Excess cash

First start getting involved with your super.  It is almost 10% of what you earn each week so start taking an interest and start making it work better for you.  If I said hey give me 10% of your pay trust me I will look after it for you and I will take approx 10% in fees and no guarantee that it will grow, you would tell me to go jump.  Well that is what you are currently doing (like the majority of young Aussies so start taking a keen interest!!!.).   If you have done nothing it will be sitting there in a balanced account.  You are 30 so plenty of time to see some rises and falls before you retire. 

1. Switch you super to Growth Plus or 50 % Australian and 50% International Shares or combination of all three (talk to Australian Super to get this sorted or just go into your account online).

2. You seem to have the capacity to save so start being smarter with your excess cash and salary sacrifice (pre tax saving) to your super.  If you put say $200 a week towards super as a salary sacrifice or as much as you can afford you only pay 15% tax on it rather than the 40% you are paying now.  The $50,000 you have saved (post tax) could have been $80,000 pre tax dollars to your super for example.  The balance of your pay is then taxed at a lower rate as you have trimmed off some of the excess you are paying tax on.  You will find that $200 sal sacrificed will only drop your take home pay by a fraction of what you expect

3.  You can add the $50,000 to your Aust Super account as an after tax contribution and you can start earning on it via your existing fund.  Check with your fund but you may also be able to access it at any time in the future if necessary as it is a post tax contribution (as a bonus the Fed Govt will also cough up an amount called a co-contribution when you take this option.  It used to be a $1000 but would be less now so look up co contribution on the ATO web site).

4.  If you invest the $50K in shares or a fixed term deposit rather than super then you pay tax on the earnings at your marginal rate (40% roughly based on your current income). 

5.  As mentioned in your mail fixed term gives you approx 2.5% at the moment so $1250 after 1 year.  You will lose approx half in tax.  In answer to your question above why I asked do you care if the $50K goes up or down, this is answered here.  Fixed term gives you interest and the $50K is there in full at the end.  ie after a year the investment is worth $51250.  If you go for CBA shares for example then with $50,000 you could buy approx 700 CBA shares at the moment.  They just paid their final dividend today at $2.31 per share so you would have pocketed $1650 today on the shares and then in March another $1400 approx as the interim dividend, roughly $3000 pa rather than the $1250 on fixed term deposit.  The problem with shares though is that they can go up and down so next year the $50000 may be worth $60000 or $40000 if you needed to sell them (no guarantees).  The reason for my question is if you do not want to sell them or access the funds then you are ok as you still own the shares and get the dividend no matter what the shares are worth.  Buy the time you are 60 CBA shares will be worth $100 or $200 a share based on past performance

6. The last part is property investment. If you cannot afford to buy in Sydney.  Rent where you want to live and invest where you don't want to live.  Where you don't want to live some people do and they will rent off you and this will pay the mortgage.  So if you want to invest the $50K in a unit do this and you can invest in a $400000 unit somewhere and the mortgage payments and expenses to keep it can be written of your taxable income (negative gearing).

Do all of the above and you will be well down the track to being a self managed retiree with lots of cash when you retire at 60.

I should add that if you start a self managed super fund then you can do all of the above and the house rental will be tax free when you sell it if you buy through your self managed fund.  This option is not available to you at the moment via Australian Super.  Self Managed Super is a whole other post.

Now the best advice I can give you.  Based on everything I have said above you have the information you need so start reading up on all the tips I have provided and become an expert in investment options.  Believe me it will become enjoyable.  It is easy when you know what you want and how you are going to get there.  Good luck.

[Daly87]

3 minutes ago, TwoHeadsTas said:

I have some of my super fund monies invested with LaTrobe Financial, which pays 5.2% interest, and another swag with Vanguard International Shares ETF (VGS) which gives me international exposure without direct investment.  Happy with both of those, would otherwise be happy to look at an ETF or LIC for ASX exposure if I didn't have direct share investments.

That vanguard is one I am looking at. so you use your super to invest in Vanguard? Is that a SMSF?

[Lucky Phil]

@Daly87 One more thing salary sacrificing to your super fund has an annual cap.  I think it is $35000 but could be $25000 if you are only 30 (have not done it for a few years).  Your employer will let you know the annual cap for your age.  If you exceed this annual cap your super fund will tax you at the marginal rate not at 15% for any contributions in excess of the cap. 

As mentioned study up before committing to anything

[Daly87]

@Lucky Phil Wow. thank you so much for taking the time and effort to give such an incredible reply! That has given me so much to look into and honestly a lot of excitement to see where opportunities lie. All is not lost with me haha I have been concerned lately as I have been living with no second thought about the future up until recently, no savings, spending everything I had on travelling, eating out, drinking basically living like I make double what I do. so two years ago I started saving, now I am in flow of saving some, spending the rest I actually see no difference in my lifestyle, still holiday and go out - no idea where it all went before??

I am certainly going to question salary sacrificing my super with my employer, sounds like an absolute no-brainer. Saving AND paying less tax!? 

I will also look into changing the allocation of my super, will require me to do some more research on this. to double check I have a good low fee super too.

No I just need to decide what to do with my little investment pot...

I see your point about investing in shares and the 40% tax hit on the profits. That hurts! But I guess there is not much you can do to avoid that.If I invested now with 50k, and in 30 years time I sell them for 150k, I would then pay 40% tax on the profit?? as in $40k in a lump tax hit? Or would it be over the course of the years, i.e every tax return you pay a little more on the increased value?
Using it to invest in a house could be better for tax reductions, while having someone pay of the mortgage. I guess the risk here is no tenant, fees and costly repairs.

I think I would probably put it into shares first, like vanguard for instance. Then start saving again to put into a house. My thought process here is if I need to make extra payments to the mortgage, because rent doesn't quite cover the running costs, then I will find it hard to save again for share investments during this time... Right now I am having no problem putting $2-2.5 a month away.

This is going to take some more time to assess. I do plan to 'make a plan' then see an accountant/investment adviser too. I just need to understand what options I have first, to which you have helped massively.

SMSF - not for me, certainly not at the moment anyway!

Summary = more in super!

Thanks again! I'm off to do my research (the geeky engineer in me loves this bit).

[Peter M]

Do you own a Porsche?

[TwoHeadsTas]

55 minutes ago, Daly87 said:

That vanguard is one I am looking at. so you use your super to invest in Vanguard? Is that a SMSF?

Yep, but anyone can invest in it - just buy units / shares on the market.

 

50 minutes ago, Lucky Phil said:

@Daly87 One more thing salary sacrificing to your super fund has an annual cap.  I think it is $35000 but could be $25000 if you are only 30 (have not done it for a few years).  Your employer will let you know the annual cap for your age.  If you exceed this annual cap your super fund will tax you at the marginal rate not at 15% for any contributions in excess of the cap. 

As mentioned study up before committing to anything

Phil, as of 1/7/17 cap for all ages is $25k pa.  The cap is not just for salary sacrifice amounts - the cap applies to the total of employer contributions (SGC + salary sacrificed amounts, + own contributions you want to claim as a deduction).  There will be some carry forward of unused caps, think this is operative as of 19/20

[Daly87]

7 minutes ago, Peter M said:

Do you own a Porsche?

Not as yet, misses and I are still looking around for a 986 boxster. (her dad owns a 996.1 C2, does that count by default of inheritance?)

[TwoHeadsTas]

1 hour ago, Daly87 said:

I am not maxing out my super contributions just yet. I have only just found out about this incentive ( don't laugh but I found it out by reading the bare foot investor haha)
I am with AustralianSuper - not sure how they rank in terms of high/low fees. looking into comparisons now.

Have a good look at the investment options within Aust Super.  Some funds allow you to buy direct shares etc within the fund, rather than using their investment strategy options.  You should talk to an Aust Super investment advisor though to make sure you understand what you are doing, and it is a suitable investment for you (standard bean counter disclaimer?)

[TINGY]

If you are earning 110k a year you need to salary sacrifice something. Australian Super is a good fund i have been in it since 2002 and it is bubbling along very nicely indeed.

I talked my eldest son into salary sacrificing part of his income when he was 26, he is now 31 and has more super than some people i know, he is lucky he earns good money and puts in the full amount of 25k a year, set and forget, definitely worth it if you want some serious cash on retirement.

Does your missus work? Why don't you look at splitting a mortgage with her and buy some property, i did this when i was 19 with mine and we haven't looked back.

[Peter M]

27 minutes ago, Daly87 said:

Not as yet, misses and I are still looking around for a 986 boxster. (her dad owns a 996.1 C2, does that count by default of inheritance?)

Since you have nearly 100 posts here I suspect owning a Porsche is important to you.

How about spending some of your money on a Porsche that won't likely depreciate (944, 968 or 996) and then with what's left do what the wise brains above have suggested?

Use the death bed test is my suggestion.

 

But good luck with whatever you decide as you seem a nice young bloke.

[Daly87]

3 minutes ago, Peter M said:

Since you have nearly 100 posts here I suspect owning a Porsche is important to you.

How about spending some of your money on a Porsche that won't likely depreciate (944, 968 or 996) and then with what's left do what the wise brains above have suggested?

Use the death bed test is my suggestion.

 

But good luck with whatever you decide as you seem a nice young bloke.

Thanks Peter! Yes I love Porsche's, I am planning to get one - no doubt. I absolutely love going in the FIL 996. I was looking at a 986 because a) cheap and b) coming from the UK I have never owned a convertible. I will have one, but as with all my other car ventures, I take a while to pull the trigger - drives the misses crazy with my obsessive behaviour of the hunt.

However I realise I blow a lot of money, a lot went on cars too. So i am planning to balance out the losses with planning for my future, something I wish I was educated on much earlier in life! I have a younger 19yo brother, who I am guiding into some financial sense too so all this research will be filtered to him. (My folks are not financially literate so was never a topic of conversation in the house)

PLEASE, tell me what the death bed test is! 

[Coastr]

As a young guy try reading the website mr money moustache (google it). Not everyone’s cup of tea but does get the head right on acing and bursting while young, and stepping away from the high consumption lifestyle.  You can double your returns by dialling back the cash wasting.

look into international funds as Aussie market full of dog companies and not many high return industries.  Not everything just a good chunk.  You can ‘buy’ the us market using a vanguard ETF.  A good mix of funds leaning towards growth at your age will do well.  When you’re older you can switch to dividends to get spending cash.  

Also look at small commercial real estate in good locations with good tenants.  Long tenancies, few costs and much higher rents. Avoid anything strata titled at all costs, you want something where you are in control of the land, because that is where the value is.  Buildings go down in value and land goes up.  A house or shed is 50/50 land/building value and a unit is 10/90.  So your 90% cost goes down and your 10% goes up.

Id start by putting it into a fund and start looking for a 3-500k investment property, one that has good rent yield and valuable position.  It might be ugly but look at the numbers not the photos.

[Peter M]

2 minutes ago, Daly87 said:

PLEASE, tell me what the death bed test is! 

It's a test to sort out what's really important to you.  Essentially you ask yourself what will you remember and look back fondly on when you are on your death bed.

For example I expect I will look back warmly at a number of drives I've done with guys on this forum.   Especially the ones that Tingy made me do in the rain!  A number of travel experiences is another I will treasure.

I know I won't be thinking about whether my retirement account could have been $50 or 100k more.

I applaud the thought you are investing in your finances but just be careful you don't forego the fun stuff and the experiences is all I'm saying.

[Daly87]

@Peter M Ahh yes, my grandfather used to say "its no good in the bank, I cant take it with me when I am dead" - same concept.

Yes its all about balance, that is what I am aiming for. I have been leaning too much on the enjoy life side, time to get the balance right. That being a little preparation for the future but not stressing.

[Lucky Phil]

2 hours ago, TwoHeadsTas said:

Yep, but anyone can invest in it - just buy units / shares on the market.

 

Phil, as of 1/7/17 cap for all ages is $25k pa.  The cap is not just for salary sacrifice amounts - the cap applies to the total of employer contributions (SGC + salary sacrificed amounts, + own contributions you want to claim as a deduction).  There will be some carry forward of unused caps, think this is operative as of 19/20

Yep sorry @Daly87 Two Heads is correct.  I have been out of it for a while so forgot this bit.  Your sal sac amount would need to allow for the cap of $25000 less the amount the employer puts in.  You could therefore sal sacrifice $15100 based on a salary of $110,000 pa.  But keep an eye on it as yopu do not want to go over the capped amount and overtime and salary increases will affect employer contributions. 

Ok it looks you will easily hit your cap on salary sacrificing so you will still have some spare cash to invest elsewhere based on your current savings capacity.  

Investment property sounds the go to me.   

Watch out for the fees in investment models such as Vanguard etc.  Also look into SMSF.  When you look at your fees from Aust Super and then compare these against annual auditing the SMSF does not look too bad.  It is the initial set up costs that are a killer.  Wait until your current super has a nice sum in it them look into SMSF.  Lots of advice on line re this

Also watch out for advisors wanting you to invest in their products e.g AMP etc. and do not open a SMSF and pay for someone to advise on where to invest.  They charge a bomb to do this for you.  Simplest SMSF rule.  Blue chip shares and investment property.  All tax free when you cash out at 60 based on current rules.  Best way to buy investment property (no capital gains tax)

[GC9911]

I have a number of rules, but, my number one rule is “ do not put all the eggs in one basket” .  

Rule 2. Have a trustworthy accountant & seek his advice “before” you make a desicion you cant reverse, a wrong move in the eyes of the ATO doesn’t count.

Rule 3. Shares, stocks etc are no different to gambling, if you can’t afford to lose it, don’t, back to rule 1.