INVESTING IS AS EASY AS 1, 2, 3…

When it comes to building an awesome financial house, the investing piece should be the easy part. But, the reality is that most people spend hours and hours trying to work out what to do, then more often than not, they do nothing. It’s a shame, but truth be told we are not at all surprised because the financial services industry makes it much harder than it should be.

So we are going to spend the next few minutes to explain the only ingredients you need to consider to make investing as easy as 1, 2, 3.

1.  Why and when

When we ask members why they are investing, we often get crickets, radio silence, or blank looks. If you don’t know why you are investing you cannot determine where your money needs to go. So, you need to try and get clarity as to what your end game needs to look like (the outcome). It requires some planning and it’s just as much about your purpose as it is the actual investment itself. As part of this thought process, you also need to get an idea as to when you need the investment to be ready for use (the when).

Here’s two common examples of why and when:

You’re saving for a home deposit (this is your why) and you envisage needing the money to buy the home in three years’ time (this is your when). This is a short-term money goal to get cash ready to buy a home.

The other common example is building wealth for retirement (this is your why) that you want ready for use when you reach age 60 (this is your when). This is a very long-term investment to grow your financial wealth.

That’s it, two common examples of your Why and When ticked off.

2.  Structure

Structure refers to who or what is to own the investment. The structure or ownership of the investment is an important consideration for two reasons.

Firstly, the ownership or structure of the investment will determine the impact of taxation whilst you hold the investment, and again when you sell the investment. Secondly, different ownership structures have different accessibility rules and laws.

One of the most common examples of a structuring consideration relates to retirement planning.

Imagine a high-income earner investing to prepare for their eventual retirement from employment. If they own the investment in their own name, they might be paying applicable income and capital gains taxes on the investment at a marginal tax rate of up to 47%. If they instead used the same investment via superannuation (a different structure) the income and capital gains tax upon sale of the investment ranges from 10% to 15%, being significantly less than if they own the investment directly. And when using superannuation for retirement, it’s often the case the money goes into a tax-free Account Based Pension so the investor may never actually pay tax. These fact’s ultimately mean the investor is likely to get a better financial return for the same investment, just by using a different structure.

However, given we are generally unable to access superannuation before age 60, this person would need to have first considered when they need the money for use (as discussed above [the When]). We hope you would agree that there is no point investing via superannuation to save tax and build more wealth if the wealth cannot be accessed when it is needed.

3.  The actual Investment!

You’ve now got the hardest pieces of the investing puzzle sorted. Now we arrive at step 3, selecting the investment. We know why we are investing, for how long we are investing, and how we are going to own or structure the investment. All we need to do now is select the appropriate assets to do the hard work for us.

With the minute or so we have left, we’ll cut to the chase, but don’t forget we have an entire module on investing within Wages to Wealth including recommendations (and you have us as your email a friend).

So for the investment piece, we suggest you consider an Index fund to invest your money. Why?

• It’s easy
• Low cost and tax efficient
• A great way to achieve diversification
• You can get started with minimal funds (you can start with only $500)
• You can set up a regular investment plan and put your investing on autopilot
• In the long run, Index funds will outperform the majority of actively managed funds

Whether you invest in your name, an investment bond for your kids, or you’re building long term wealth via superannuation, you can use index funds as the underlying investment.

You don’t need to just take our word for it, take the word of arguably the world’s greatest investor, Warren Buffett. His advice for money to be left to his wife when he passes away is simple: put 10% of the cash in short-term investments and 90% in an Index Fund. He goes on to say “I believe the long-term results from this strategy will be superior to those attained by most investors, whether pension funds, institutions or individuals, who employ high-fee managers.” If that’s the advice the wealthiest investor gives his wife, then it can only make sense for us to take note!

And remember, you don’t need to win the investment race (aka find the best investment), you need to finish the race! However, we can assure you that by getting clear on why you are investing, how long you’re investing for, how to smartly structure the investment, then using diversified low-cost index funds, you’re guaranteeing yourself a strong outcome.

We hope you’re now equipped with the ammunition to make your next investment as easy as 1, 2, 3! And when it comes to step 3, jump into Wages to Wealth and take a look at our index fund recommendations in Modules 6 (investing) and 7 (super).

As always, if you have questions we hope to have answers. You can email us at [email protected].

Cheers,

Dan and Dave