In terms of an effective long-term savings plan, the traditional bank savings account and fixed term deposit fall very short of the mark. As an alternative, managed funds, given at least five years, have a much higher potential to surpass cash and fixed term investments.
Managed funds are also an easy way to invest in complex assets such as Australian and international shares. Through managed funds you can spread your money across different assets with one application, increasing the potential for growth. Your choice of fund can restrict the investments to particular segments, so talk to your adviser to ensure your choice meets your risk profile.
To get the best returns, you must remember to invest over the longer term. But don’t let that deter you. Five or ten years is not ‘forever’.
Your money will be exposed to capital growth through rising unit prices as well as income from distributions. The income you receive is taxed in the same way as bank interest, at your marginal tax rate, and also carries the benefit of any franking credits attached to dividend income distributed by the fund, thus reducing the tax payable.
How much do I need to start?
Depending on the fund chosen, you can start with as little as $1,000 initial investment. From here you can make regular payments to increase your returns. Salary deduction is an ideal way to establish a regular savings plan; if you don’t get it, you can’t spend it, and you will probably won’t notice it missing.
Traps with borrowing to invest
Remember the Golden Rule: live within your means. Some people fall into the trap of the revolving line of credit (mortgage overdraft). Your pay goes in each payday to reduce the debt, but you get the opportunity to spend it again. The debt makes little progress as far as any reduction is concerned. If this sounds like you then perhaps the tried and true traditional home loan is for you.
The revolving line of credit, however, can be ideal for investing and only investing. Don’t be tempted to buy personal goods. But do be careful, as all debt needs to be serviced. The interest and fees need to be paid. Ask yourself, ‘Will the return on my investment be greater than the cost of debt?’ If you can’t answer this question seek professional advice and if the answer is ‘no’, don’t invest.
The bottom line is if you’re looking to save money for the deposit on a home or that dream overseas holiday, then you need a savings plan. Talk to your adviser so that they can help set you on your way. It’s really not hard once you get started.