Pandemic drives a shift in our financial goals
A study by ME Bank found that growing savings - for a variety of reasons, tops the list of our financial goals for 2021. One in five want to build wealth for retirement, and 15% of people are eager to start investing.
These findings confirm how many Australians have been rattled financially by the pandemic. After almost 30 years of uninterrupted economic growth, 2020 stripped away any illusions that good economic times last indefinitely. And when a rough patch hits, savings can help us weather the storm.
Savings also form the foundation of accumulating wealth. But it’s not the same as investing.
Savings is all about putting money away rather than spending. That’s why economists call it ‘deferred consumption’. Yes, growing savings provides a buffer against the unexpected, like losing your job or copping an unforeseen bill. But on its own, savings won’t make you wealthy.
That’s especially the case today when you’ll be lucky to earn 2% interest on cash savings. Even if you do, inflation is sitting at 0.9%, so you’re really earning closer to 1% in ‘real’ (after inflation) returns.
That’s not making money in my books.
Investing is very different. It involves deliberately putting money into an asset in the expectation that it will grow in value over time, letting you make more money without having to give up something today (like spending).
In Australia we are lucky to have a variety of well-regulated investment markets to choose from – including property, shares and managed funds.
An important factor to look at is the costs involved in each to understand how much of your money goes to work from day one – and how much is siphoned off in various fees and expenses. Property for instance, comes with high entry costs including stamp duty, pre-purchase inspections, legal fees and loan application charges.
It only takes $500 to get started in shares after allowing for brokerage, which can be as little as $10, sometimes less. But you can still be missing a key ingredient of a successful portfolio – diversification.
That’s where exchange traded funds (ETFs) are so appealing. You can still kick-start an investment with just $500. And your money is likely to be spread across anywhere from 20 to 300 or more underlying shares or other assets. It’s an easy way to achieve diversification when you have limited capital to invest.