Pay yourself first

One reason property has been such an impressive wealth-creator for so many Australians is that it forces us to invest regularly (through regular loan repayments), almost without thinking. But property isn’t the only way to benefit from a disciplined investment plan. Here are three simple ideas to help you get ahead.

Three ways to pay yourself first

Salary sacrifice

When it comes to saving for retirement, super is the ultimate regular investment plan, so it makes sense to maximise its advantages before going in search of non-super investments. Using salary sacrifice, you can make extra super contributions from your pre-tax salary, giving you an upfront tax break of as much as 31.5%. That can make a huge difference to your investment earnings over time.

But be sure to do your sums carefully and avoid going over the $25,000 annual concessional contributions cap. There can be big penalties for mistakes, even accidental ones, so if you’re uncertain, call us to check.

Regular savings

If you’re saving for something other than your retirement and you prefer to keep risk to a minimum, a high-interest savings account is a simple and secure choice. And even though interest rates have been falling recently, there are still some fantastic deals to be had.

Right now, Australian banks are competing hard to attract deposits, driven by the need to find funds for lending at a time when international credit markets have become more expensive. For instance, a UBank USaver account with a $200 a month savings plan is currently paying 4.66% per annum for balances under $200,000, without locking your money away. And that’s just one example.

Even better, under the government’s Financial Claims Scheme, bank deposits up to $250,000 are government-guaranteed. As a result, a savings account with an Australian bank ranks among the safest investments in the world.

Regular investments

Of course, even the best savings account will only take you so far. For investors seeking a higher rate of return over the medium term, plus the potential for capital growth, a regular investment into managed funds could be the answer. You can start with an upfront investment of as little as $1,000, then build your holdings over time with a set and forget monthly investment plan.

That allows you to tap into the growth potential of a wide range of investment options, including Australian and international shares, listed and unlisted property, and fixed interest investments. So you can create a diversified portfolio through a single, regular investment, while leaving day-to-day investment selection and management to the professionals.

The power of regular investing

A regular investment plan can help you build wealth surprisingly quickly and painlessly, since you don’t miss cash that you don’t see. And the sooner you start, the more wealth you can create, putting the magic of compounding to work.

Let’s look at a simplified example to see just how powerful this approach can be.

Suppose you were to automatically put $100 a week into an investment earning 7% a year, always reinvesting your returns. For this example, we’ll also assume you’re on around the average wage, paying a tax rate of 34%, including the Medicare levy.

After one year you would have $5,328. In five years, your investment would grow to almost $30,000 in today’s dollars.

The more you accumulated, the higher your investment returns would become. By the twelfth year, something magical would happen — your returns would outpace your monthly contributions. After that, things would really start to move.

If you kept investing for 15 years, you’d have more than $241,000. All for around the price of a weekly takeaway and tank of petrol.

* Based on average full time total weekly earnings of $1,404.90 over 30 years. Average earnings data from the Australian Bureau of Statistics, Average Weekly Earnings, February, catalogue number 6302.0.