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  2. The skinny on spare change investment apps and building wealth when you’re earning $25,000 or less a year.

The skinny on spare change investment apps and building wealth when you’re earning $25,000 or less a year.

May 30, 2018

Welcome to Say What Wednesdays – Where we answer your personal finance questions each week.

Two questions this week from Chris:

No 1

what are your thoughts on investing through a platform such as acorns? In your opinion do you see it as reliable and a worthwhile investment option? Furthermore, with such platforms would you say that there is a degree of double fees being taken out (platform fees and ETF fees for underlying investments e.g. ASX ETF's) which erode earnings?

No 2

What is the best way for people on a low income (around $25,000 p.a.), such as students and job seekers to start building a growth portfolio?

Platforms

What are they? – Ways to hold all of your investments in one place

  1. Types – three types
    1. Raiz (Acorns) – Investment application (app)
      • Allows for micro investing – automatic investments
      • Limited choice of options – Growth Option, etc
    2. Investment Platforms are a bit different
      • Allows for accessing managed funds, shares at wholesale level
      • Range of choices of funds
    3. Broking platforms
      • Direct shares mostly
  3. Costs – Admin fees
    1. Raiz – 0.275% p.a.
    2. Investment platforms - platform fees generally higher
      • Flat fees - $175 to $600 p.a.
      • Percentages - 0.4% to 0.1%
    3. Broking platforms
      • Transactional costs when you buy/sell investments
  4. Benefits
    1. Raiz
      • Nice, simple easy way to start
      • Automatic savings takes away the hands-on approach
      • Passive
    2. Platforms
      • You can have actively managed funds
      • Specialist Managed funds in certain sectors
      • I have an account – Buy small cap, micro-cap, international, emerging market fund etc. Wouldn’t really get that much in the way of large cap here, as that is ETF
        • Small cap – 25% p.a. for the past 8 years
        • Worth it if you know how to use it right
        • For ETFs, shares, Large cap, probably not worth it.
        • They do consolidated tax statements for you (that's what the admin fees are for)
        • Don’t have to meet minimums on fund purchases - $25k to $500k
    3. Broking
      • Benefits – no ongoing holding costs
      • Can buy the same ETF in RAIZ in broking platforms, for broking costs
      • Upfront costs may be higher, but no ongoing. 

 

In my opinion, if you are starting out, probably better to start somewhere than not start at all

  • Especially if you aren’t familiar with investments or good at saving, may as well go with app to do it for you. Better to start with something then never start.
  • Broking platforms – Can have large upfront costs
  • Investment platforms are good, if you have enough to justify it
    • But only if you use the specialist funds that you have access to – geared, emerging markets, micro-cap, etc.

 

To answer Chris’s second question

There are two options for students

  1. Hands on/personally invest
    • Focus on Franking credits, or high growth long term – You will get more back in income than what you would pay in tax
    • Need low transaction costs and diversified – Good Fully Franked LICs or ETFs are an easy place to start
    • Super co-contributions – free money
    • $1,000 (post tax) = $1500 investment
    • Comparison over 3 years at university, while earning below $37k p.a
  3. It’s a boring answer for long term benefits – superannuation as an investment vehicle!

Each year you put $1,000 into super, or $1,000 into the same investments personally. Who wins?

  • Either way you put $3,000 towards investments
  • In super you get an extra $1,500 (or 50% return) straight away!
  • By the time you access it, say 40 years, earning 8% p.a. (4% income, 4% growth)
  • Personally, after you get taxed on the income at say 34.5% = $37,031
  • Super gets taxed at 15% = $72,965

 

Awesome questions Chris! I hope I covered off on it all.