An exploration of money, mindset and a meaningful life

Investing for Beginners

Have you held back from investing because it all just feels too intimidating? I get it, being a beginner is hard because it feels like there is just so much to know. But I’m here to make things as easy as possible for you, you don’t have to do this alone.

At its most basic level, investing is just putting money into something with the expectation of making a profit. There are many ways that you can do this, whether it’s investing in a business, a property, shares, cash, artwork or collectables, or just investing in yourself so that your salary increases.

Where it gets complicated is the fear and emotion that comes into investing. So many women don’t venture into the world of investing for fear of losing money and rather than reducing that fear by learning more about other types of investments, they just stick it in a bank account. And don’t get me wrong, saving is good, but investing in cash (especially in an exceptionally low-rate environment like it is now) is actually NOT a risk-free endeavour. Let me explain.

Investing in Cash

When most people think about cash they think about putting money into a bank account, but there are actually many ways to invest in cash. Cash investments are essentially short-term loans of less than 90 days. Even when you put money into a bank account, the bank will (should!) pay you an interest rate for the privilege of using your money. And yes, they then go on to lend that money out, along with many other people’s, to large institutions who need short-term cash to manage their business cash flow. As well as bank accounts, you can also lend your money and receive an interest rate from products like term deposits and certificates of deposit (which tend to be much larger sums of money).

The biggest problem with investing in cash alone is the effect of inflation. Inflation is the percentage of annual growth in our living expenses. This increase, which is measured by the Consumer Price Index (CPI), erodes the value of our money because over time we are able to buy less and less with the same amount of money. If we’re investing our savings at a rate of 2% per annum and the CPI is 3% per annum then we are actually going backwards by 1% per annum. It’s certainly not an effective way to get ahead.

Having said that, investing into cash is an important first step when saving for larger amounts to spend or invest, or if you have a relatively short timeframe in which you’re going to need to access your funds. Generally speaking, one of the best things about cash, along with its security, is its near-instant accessibility of it, which we call liquidity.

How to: If you’re going to invest in cash, make sure you look for a high-interest savings account, see here for a comparison of rates available in the Aussie market right now. And remember, this should not be your only vehicle for growing wealth, especially over the long term.

Investing in Property

Ahh, the darling investment of seemingly all Aussies. Buying real estate is so part of the great Australian dream that it’s often assumed that everyone should be doing it. But is it the be-all and end-all of financial security? Not necessarily. Not all property investments are created equal, every single property needs to be considered on its own merits. Although most people think about a house in the suburbs, there are many types of property investments: buying your own home, residential rental properties, commercial properties such as retail shopfronts, office buildings or factories. There are also multiple ways to get access to real estate investments, which I have covered below in the “How To” paragraph.

Some things that you need to consider when investing in property are:

a) what is the purpose of this investment – whether you are buying to live in or buying to rent it out will affect where you buy and how much you are willing to invest

b) how long will I be invested – property has a LOT of upfront costs which makes short-term investing very expensive.

c) how much do I have to invest – property generally has a very high barrier to entry due to the cost involved. Even if you are planning to take out a mortgage to fund part of the investment even saving for a 20% deposit, plus expenses can be onerous.

Once you have decided to buy there are two main factors to consider when deciding on whether a property is a good investment. The first is working out what the income yield is and the second is working out the potential for capital growth. The income yield is fairly straightforward, it’s just a matter of knowing the net rent (total rent minus costs of renting it out) and dividing it by the value of the property. 

For example, if you are buying an apartment for $600,000 and you receive $30,000 per annum rent and pay $2,000 in strata costs and $1,000 to the rental agent then your yield would be $27,000/$600,000 = 4.5% per annum. This calculation is obviously very much simplified and you will need to make sure that you take into account all the costs of not just renting it out but also the transaction costs of purchasing the property too.

Estimating your capital growth is a little more difficult, but just know that in general the higher the risk, the higher the potential for reward. If you’re buying in a mining town, for example, the potential for capital growth will be much higher than in a blue-chip suburb in a major city – but remember the potential for loss will also be much greater too. Weighing this up will be something very specific to your own tolerance of risk.

How to: You can either invest in real estate by finding a physical property and making an offer, or you can also get access via Real Estate Syndicates or funds or by investing in listed real estate trusts (known as REITs) which usually consist of commercial and retail properties both in Australia and overseas.

Investing in Shares

Also known as stocks or equities, many people are freaked out by the idea of investing in shares. But really, when you buy a share you are simply buying a small percentage of a business, that sells goods or services in exchange for money. This little ‘share’ in that business is then listed on a stock exchange, which is like an electronic marketplace. The exchange (such as the ASX or NASDAQ) then facilitates the buying and selling of shares in the various different companies that are listed there. If you own a share or multiple, you then get a share in the distributed income (dividends) and potential for profit (increase in share price) of that company. I think what scares most people is that they can see the value of the share go up and down in real time. In reality, if you bought a house, the value of that would also change at any given time based on the demand for that property (as well as many other factors), but because individual houses aren’t traded through an exchange we just don’t have visibility of the price fluctuations like we do for shares.

Once again, when considering whether to buy a share (or multiple) you want to consider the income and capital growth potential. You will want to evaluate the type of business, how well it’s run and the potential for them to make money in the future. In most cases, you wouldn’t buy shares in just one company, as the risk of holding multiple shares (with different characteristics) lowers your risk, this is called diversification. You also want to consider the timeframe that you have to invest. In general, you want to be invested in shares for a minimum of about 5 – 7 years. While shares are very liquid (you can sell and have access to your money in 3 days), you don’t want to be in a position where you have to sell them at a time when the shares may be down in value.

How to: The good thing about investing in shares is that there are ways of accessing them without having to invest large sums of money. If you are just getting started you may want to consider investing in a managed portfolio, where there is a manager who chooses which companies to buy shares in. You can do this via a managed fund or an Exchange Traded Fund (ETF). As for actually getting started, it is just a matter of opening an account with a fund manager or buying through a share trading account. Micro-investing via an app is also a new way to start investing on a very small scale and get a taste for how investing works. If you’d like more detailed information on share investing you also can read my blog series on The Why, The What and The How.

Other investments

There are SO many different ways to invest and unfortunately, I can’t go into them all here. Other investments include fixed income (bonds), foreign exchange, private equity, artwork, wine, collectables, crypto-currency, gold and many many others. But also remember that one of the best investments that you can make is in yourself. Your ability to earn more, whether that be in a professional or entrepreneurial capacity is based on your knowledge, confidence, mental health, emotional management and determination.

Disclaimer: The information contained in this article is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate for your needs and where appropriate, seek professional advice before making any financial decisions.