Mortgage paid? Save for the future
Now that you’ve paid your mortgage off, here are three ways to start thinking about building wealth for tomorrow:
- Invest regularly in managed funds
Paying off a mortgage teaches you the healthy financial habit of saving a certain amount of your pay check each month. Why not keep up that discipline with a regular investment into a managed fund?
Managed funds can help you gain exposure to a diverse range of assets, even for a relatively small investment. You’ll also get the benefit of the expertise of the fund manager who selects and manages the investments — so there’s no need to research and choose stocks yourself.
By regularly investing the same amount of money over time, you’ll be employing a strategy known as ’dollar cost averaging’. Dollar cost averaging is an investment technique where money is invested at regular intervals, rather than in a single transaction. By investing on a regular basis, you don’t need to rely on ‘timing strategies’ which aim to pick when a market has peaked or reached the bottom of a cycle.
You make regular contributions regardless of what the market is doing, which means sometimes you pay more, sometimes less for your investments. The differences in price even out over time.
Dollar cost averaging imposes investment discipline. It is useful to slowly build exposure to markets and smooth out the risks associated with market fluctuations.
It’s like buying $100 worth of apples every week — you get more when they’re cheap, so you end up with more cheap apples than expensive ones. Then, if apples go up in price, you’re investment should be worth more than you paid for it. However, the cost of apples will go up and down.
- Salary sacrifice into super
Another good place to invest some of your income is into your super, through a salary sacrifice arrangement.
It’s easy to do — simply arrange for your employer (if this option is available) to pay part of your pre-tax salary into your super, along with the compulsory superannuation guarantee super payments they already make. There are limits to the amount you can contribute so ensure you seek financial advice.
Salary sacrifice may also be a very tax-effective strategy. That’s because it comes out of your pre-tax earnings, which means it may lower your assessable income. As a result, you could pay less income tax each year, while building your retirement savings.
What’s more, the money you salary sacrifice to your fund is taxed at just 15% within super. So if you’re in a higher tax bracket — for example, if you’re paying a marginal rate of 46.5% tax — this could reduce the tax you pay on this money by 31.5%.
- Diversify into other types of investment
Many Australians like to put money into investment properties. And there’s no question that this could be a great investment, with potential capital growth and rental income. But don’t forget the importance of diversification, spreading your investments across a range of assets, markets and industries — including overseas.
For example, international shares can give you exposure to rapidly growing emerging markets, such as China, Russia and India. You can also enjoy access to the developed markets, and some of the world’s most successful companies.
You may also want to consider investing in fixed interest assets, like term deposits or bonds, for more predictable returns.
Or if you are keen to stay in property, indirect investment property is another option. By pooling your money with other investors into a property fund, you can gain exposure to commercial or overseas property, at a lower cost than investing directly.
If that all sounds too hard, there are plenty of managed funds to choose from, that can provide instant diversification — without having to do the legwork yourself.
Making your money work for you
Investing can be complex, and everyone’s financial situation is different. So it’s important to get the right financial advice. A financial adviser can work with you to determine the most tax-effective investment to make the most of your surplus cash.
