Say What Wednesdays
High Roller; Start Investing with $1,000
Welcome to Finance & Fury, the Say What Wednesday edition, where we answer your personal finance questions each week. Today’s question comes from Tara;
“Hi Finance & Fury, love the show! I was wondering whether you would be able to provide advice on the best way to invest $1,000 – $2,000? Would love to hear your suggestions?” – Tara
Awesome question and thanks for getting in touch! Not technically allowed to provide ‘advice’ – but I can give a general outline on what to look for when starting to invest.
Starting to invest is hard – especially when you don’t have 10s or 100s of thousands of dollars.
- Hard to get diversification
- Hard to get low cost
- Hard to get in based on minimums
Where to start
- What are your goals?
- How long is it for? – Investments should be made for the long term. If you’re at a timeframe under 3 years, I probably wouldn’t suggest investing at all
- Will you need to access it at any point? – If yes, how long?
- If you need to access the funds in the short term (3-5 years) something more defensive would be better
- If you’re looking at longer (7-10 years), it’s safer to invest in growth assets
- If you’re looking at an even longer time frame, or you don’t need the funds until you’re 60, you could consider a different environment all together, like super.
- How much risk do you want to take on?
- Determines the allocation between growth to defensive
- Will you be making further investments?
- Determines what type of investment
- Buy sell vs brokerage – fixed dollar transaction costs can really add up when compared to costs that are based on a percentage of the investment amount.
- Keeping costs low
- Transaction costs
- Brokerage can start eating away into your capital
- Buy Sell spreads
- Platform costs/Brokerage accounts
- Accounts charge
- Getting diversification at low costs
- With $1,000 your investment options are limited to get many different underlying funds
- Need a range of shares across different countries. You need a range of asset classes as well.
- Transaction costs
Let’s look at 4 different options for investing $1,000
- Purchase one share for $20 brokerage (2% transaction cost). This is not great.
- Direct shares – One share offers no diversification and is open to high volatility
- LIC – Has diversification, but in one asset class with about 20-50 holdings on average
- Managed funds
- Buying directly from the manager isn’t an option as they have minimum initial purchase amounts ranging from $10,000 to $500k
- Purchase managed funds on a platform to get around the minimum buy-ins
- Platform – Probably looking at $200 in admin costs per year = 20% of the value in this case.
- Single ETF – you can get an index fund, which provides a fair amount of diversification within an asset class
- Multi-managed ETF – Single purchase for $20 brokerage, you could pick up 7 or more other indexes
- Contributing to invest inside superannuation – WARNING: won’t have access until you’re 60 years old – so this is for the very long term
- Non-Concessional (Personal) Contribution (NCC)
- Works well for those with a low taxable income (less than $36k including Salary Sacrifice or Fringe Benefit Tax)
- Post tax contribution
- No contribution tax paid going into the account (Low Income Superannuation Tax Offset). This is capped at a maximum offset of $500.
- Effectively turns $1,000 into $1,500 invested – in addition this sits in a lower tax environment
- Example – buy the same investment in super as a NCC vs buying an investment personally (outside of super)
- Assuming 8% p.a. for 30 years
- Personal – $1,000 at a 21% tax rate = $7,960
- Super – $1500 at 15% tax rate = $12,770 (60% more over a 30-year period)
- Concessional (pre-tax) Contribution (CC)
- Better for those with a higher taxable income, but look out for the concessional contributions cap
- Contribute $1,000 and reduce your taxable income by that amount by claiming a tax deduction on it. E.g. Earning $100k = $390 of tax back personally.
- Effectively turns $1k contributed into $850 invested, once super contribution tax has been taken out
- Look at the diversification!
- Compare the upfront and ongoing costs
- Make sure it lines up with your goals and investment time frames
As always, if you have a question you want answered on Finance and Fury, get in touch with us on the Finance & Fury website contact page.