finance

From 'what is a share' to how to invest: 7 questions you're afraid to ask a financial advisor, answered.

1. What is a share?

It’s a share in a company – you own a little slice of it.

Shares were around long before crowdsourcing was a thing, but it’s the same concept: people pool their money to provide funding to a company.

Most of us have to buy our shares on the market, usually the Australian Securities Exchange. You need to use a broker, who does the trading for you.

Back in the old days that was normally a guy on a phone – think Leonardo in Wolf of Wall Street. But now it’s common to have an online broker, so it’s just a matter of signing up and putting in an order online.

How do you make money from shares? If a company is doing well, its shares may increase in value (i.e. the share price goes up). That’s when you get capital growth – just like when your home value increases.

And if the company makes a profit, it might pay you a dividend, which is a share of that profit. That’s known as yield or income and is similar to getting rent from a tenant. I like to call dividends a ‘thank you for investing in us’ present.

Because the value of shares go up and down, they are usually recommended as a long-term investment – upwards of five years.

Side note… the team at Mamamia confess how much debt we’re in. Post continues after video. 

Video by MMC

2. Can I invest $5? How much money do I need before I start investing?

In theory you could buy 10 shares in Myer and keep the change (on 23/1/20 they were trading at 0.46 cents each). If you’ve shopped there in the last five years, my guess is you wouldn’t.

In practice though, the ASX has set a minimum of $500 for your first trade, to cover its costs.

You’d also have to pay brokerage, and the cheapest broker (Selfwealth) charges $9.50 a trade… so yeah, maybe save up your $500 first.

An alternative approach is to use an app like Raiz, which has a minimum $5 investment. By pooling your money with other people’s, it’s designed to start you small and take tiny amounts from your account each time you spend money (a ‘round-up). The monthly fee is $2.50 – so if you do start with $5, you’d want to build that up quickly to make it worthwhile!

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Overall, make sure you have your other financial obligations covered first. For instance, do you have an emergency fund that could cover your expenses for at least a month? Have you paid off your expensive credit card debt?

If the answer is yes, then you can consider how to put your money to work elsewhere.

3. Is it worth paying off a HECS loan? Should I prioritise that above other financial decisions?

HECS is likely to be the cheapest loan you’ll ever have (unless the Bank of Mum & Dad has come to the party).

It’s cheaper than a credit card, home loan, car loan or any other product a bank has sold you (with the idea of making a profit).

Some people like the mental achievement of getting rid of their HECS debt, but in the scheme of things, I reckon there are better things to do with your money than pay back the government. Things like: pay off your other debts, buy the home you want or invest.

4. How long do I need to invest for before it becomes worthwhile?

It depends what you’re investing in. And more importantly, why you’re investing. An adviser will find out what your goals are, then build a financial plan around that. So the plan for a home deposit ten years from now will look different to a plan for a retirement nest egg.

It all comes down to risk – the longer you have to invest, the more risk you can tolerate. Over time, the ups and downs are smoothed out.

As a rule of thumb, if you might want your cash back within five years, a high-interest savings account or term deposit might be a better idea. Beyond five years, other types of investments like shares, property and bonds can make sense.

5. When should I start contributing to my super, and how much?

Now! You should start right this second!

If you’re in paid employment you probably already are contributing. Your employer must pay 9.5% of your earnings into a super fund if you earn more than $450 per week.

Which is good, because did you know that women currently retire with around half the amount that men do? Yep, an average of $197,000 vs $105,000.

Women’s super balances are smaller because we earn less (hello pay gap!), work part-time more, and take career breaks to raise kids.

But if the question is when to pay extra into super, the answer is still ‘right now’!

Given all the career breaks, we need to boost our balances by making more contributions when we can afford it.

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Remember, there are tax benefits to super – the taxman takes just 15% of your hard-earned cash if it goes into super, versus up to 45% income tax, depending on what you earn.

How much to contribute? As much as you can afford.

A lot of boffins agree 9.5% isn’t enough, and we should aim for more like 15% (so, topping up by 5.5%). That’s been my goal for most of my working life.

Or you might want to allocate a dollar amount based on the other expenses. The golden rule is that the earlier you start, the easier it is.

But it’s never too late – we live a bloody long time these days, and unfortunately, we have to work for a big chunk of it!

6. Where do people invest other than property?

Different types of investments are called ‘asset classes’. I like to think of them as a shoe wardrobe, with varying levels of comfort (risk) and style (reward).

Down at the ‘boring but safe’ ballet flats end is cash: money in the bank, ideally a term deposit or high-interest savings account. This is the safest place to stash your money, but the returns are low, especially with interest rates at historic lows.

Up in the high heels department are property and shares. Bear in mind property doesn’t just need to be buying a home and renting it out: you can invest in commercial property, for example, through property trusts on the ASX. Similar to buying shares in a company, you buy a tiny slice of a shopping centre empire or a portfolio of office buildings.

There is a wide spectrum of risk within these whole asset classes. Like, you can buy shares in a tiny tech company that promises to be the next big thing – but you can also lose the lot if it goes under. These are your ridiculous party heels you can barely walk in.

Or you can buy shares in a Big Four bank, and while the price might go up and down, it’s unlikely the whole bank will go out of business. These are sensible work heels.

Similarly, your friend whose husband says some piece of land out in the boondocks is a sure money-spinner? They risk losing serious money. Buying an established apartment in a capital city and holding it for 20 years? Way less risky.

Want more investment tips? Listen to Mia Freedman’s interview with the Barefoot Investor, Scott Pape. Post continues after podcast. 

Another asset class is fixed income – most often in the form of bonds. These are your gym shoes: reliable and comfy.

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A bond is a loan that you make to a government or company. They pay you back the interest over the life of the loan, which gives you income. Then at the end of the loan, all going well, they give you back the amount you lent.

Even boring old bonds have a risk spectrum, from super-safe Aussie government bonds through to ‘junk’ bonds. Unless you’re retired, most investors have bonds in their portfolio to provide some security alongside riskier assets like shares or property. They’re the kind of thing you’d want to talk to an adviser about.

7. What’s the simplest, easiest way I can start investing my money?

I don’t like to call investing complicated, but I also don’t like to call it simple or easy.

It needs to be approached in the context of a bigger conversation. What are your goals? What other money responsibilities do you have? What level of risk can you handle, mentally and financially?

If you can get clarity on these things, you get a better idea of the right investments for you.

I recommend reading, watching and researching for a bit. Not that you need to be the next Warren Buffett (he’s the Beyonce of investing).

But you do need to feel in control and have the ability to think critically about your options. I love moneysmart.gov.au for simple, unbiased information on lots of topics.

The Raiz app is like training wheels for investors, so it can be a good way to get comfortable with shares. Of course, do your own research and make sure it suits you.

One of the best investments you already have is your super fund. Sure you can’t access it until retirement, but I promise, you’re gonna really love it at that point.

Australia’s super system is one of the best in the world, so if you can spare any money for your future self, stick it in your super fund (you can add up to $25K annually and still get that sweet 15%). There’s a bunch of professionals looking after it for you!

You can ask your employer’s payroll team to make extra payments from your pre-tax pay (aka salary sacrifice). That way you get the tax benefits straight away.

Even if they don’t offer that, you can just pay into your fund yourself, then claim the tax back in your tax return later on.

Honestly, I spent about four months researching what to wear to my 40th birthday. I bet you’ve done a similar thing. So if you can give that level of commitment to researching your entire financial future, why wouldn’t you?

Belinda White is on a mission to help women fall in love with finance. Her blog, Fierce Girl Finance, makes investment topics funny, relatable and easy to understand. Her promise? No jargon, no men in suits and lots of Beyonce.  

Feature Image: Getty.

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