Investing on a Budget

Following on from our last blog post about inflation, what can we do when savings accounts don't currently pay more in interest than we lose to inflation?

One way is to invest in something which is expected to earn us more than the rate of inflation. There are many types of investments available, but let's look at some investment options for smaller budgets.

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Superannuation

For saving for retirement, putting extra money into superannuation can be an effective way to invest small amounts of money. These voluntary contributions can also be eligible for a tax deduction, up to a limit of $27,500 (including the compulsory contributions made by employers), so putting a little extra into superannuation can have other benefits as well.

The downside to this strategy is that superannuation generally cannot be accessed until the preservation age is reached. It's not going to work for saving for a holiday but it can be an effective long term strategy.

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Managed Funds

Managed funds pool money from many investors into one fund which then invests in different types of assets. They are managed by a company which charges a fee for their role in selecting investments according to the purpose of the fund. Most managed funds spread their investments across many different assets in order to reduce certain types of risk. They can be an effective way to build a diverse portfolio without having to buy and hold many individual assets.

Managed funds often have a minimum limit to open an account , so choosing this option might mean saving up for some time to get that initial deposit. Some managed funds also have minimum limits for ongoing deposits, so setting up a direct debit on a fortnightly basis might not work with a small budget. Withdrawing money is usually quick and easy which can make this a good choice for medium term savings goals.

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Microinvesting

Microinvesting platforms allow small transactions into and out of an investing portfolio. Linked with a bank account, they can often be accessed via a phone app. In Australia, the minimum investment required varies between different platforms but ranges between $0 and $50. They offer different portfolio options according to risk and invest across a range of assets to reduce some risks.

Like the managed funds and superannuation, these platforms do charge fees, and may not produce competitive returns in comparison with other strategies. In addition, while savings accounts held with a bank are protected by the government in Australia, investment products do carry risk and it's possible to lose money.

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Choosing a Strategy

There are a lot of options available for investing on a budget but some basic principles still stand even when the amounts invested are small. We need to keep in mind both the timeline for our financial goals, and the level of risk with which we're comfortable.

Our goal timeline will affect the type of investment we choose, depending on how easy it is to add and withdraw funds, keeping in mind that superannuation is often a very long term strategy. Our comfort with risk determines how we choose a portfolio once the investment type has been selected. Once we know these two things, even small amounts of savings can be invested to meet our goals.

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* The information provided in this article is general information only and does not take into account your objectives, financial situation or needs. Before making a financial decision, please assess the appropriateness of the information to your individual circumstances and consider seeking professional advice.