How to invest 20k in Australia

So you’ve read this blog, tightened your belt, boosted your income and managed a great savings rate for some time. Maybe you got lucky and your hard work was rewarded with an annual bonus, or you completed a really important contract. Either way, you’ve saved up $20K, and now want to know how to invest 20K in Australia…

Now, where to invest this cash

Stash some of your $20K into an online savings account to form your emergency fund

If you don’t already have an emergency fund of around $1000-$2000 parked in an online savings account, you need to give yourself a nice firm slap on the face. Did it hurt? Good. An emergency fund is a basic essential requirement of being a functioning adult member of society!

Cash is what we use to perform transactions, so you will always need a bit of it on hand. Cars break down, family emergencies occur, and last minute flights need booking. You always need to little safety net you can dip into as a last resort (and which you then endeavour to replenish ASAP).

Depending on your expenses, family situation and job stability, some people recommend increasing your emergency fund from a few thousand dollars at a minimum, up to around 3-6 months living expenses. I agree this is a good move in general, but if you have a stable job then this idle cash could be better put to work somewhere else such as a mortgage offset. But I would always keep a few thousand in cash, tucked away in a no fee online savings account just in case!

Pay off your consumer debt

Consumer debt is like a rope wrapped around your feet, whilst your trying to swim. It keeps you tied to your job, and maybe other shitty personal commitments.

After establishing an emergency fund, the first thing you need to think about doing is to pay off your consumer debt. If you have credit card and personal debt – you have an emergency. You should not be consuming luxury items not driving a car. You should pay these off ASAP! Having your $20K sitting around idle in a bank account is a dumb move, instead you should use it to cancel out any debt contracts you have entered in.

Paying off consumer debt is going to be your best bang for buck! On average, consumer debt sits at between 10-15% interest rates, but we all know about credit cards and other lenders charging ridiculous 20% annual interest rates!

Because a debt is always paid using post tax dollars, paying off this consumer debt has a massive effect on your overall financial health and net worth. Personal debt like credit cards is not tax deductible, which means your paying it off with income you’ve likely already been taxed at around 30% on.

This means paying off a 20% interest rate credit card is equivalent to getting about a 30% return on investment – something you would never find in any sane, repeatable or safe investment! Getting rid off this debt immediately should be your number one priority! This is one of the hidden traps of debt and the working class, and is why poor people struggle so hard to get out of debt.

Your order of priority should be either a debt domino, where you pay off your smallest debts first to bask in the psychological goodness of seeing them destroyed one by one, or if you are a bit more mathematical and calculating like me, then pay off your highest interest loans first; the following is an example guide.

  1. Credit card loans
  2. Personal loans
  3. Car loans
  4. Student loans

Pay off your mortgage

mortgage
The great Australian dream? Add a few financed cars, and some credit cards thanks..

After you’ve paid off any dumb debt like credit cards, personal loans or car loans, then make a stab at paying down your mortgage. We are always told that a mortgage is ‘good debt’ and that you should be perfectly happy having a mortgage. Are you ready for another slap in the face…?

This is a lie told to you by real estate salespersons, mortgage brokers and banks. Why? Because they want to sell you products of course! Expensive mortgages bring with them lots of lovely little fees and charges, and even some whopping percentage transaction ones too. Anytime you are buying something, there is someone with a vested interest! Don’t take financial advice from anyone, be suspicious and guard your wealth.

A mortgage on your primary place of residence is not as great as everyone says. This is costing you money and it is NOT tax deductible at all. Just like your credit card debt, your paying this down with post tax dollars that you’ve worked hard to earn, been taxed on, and now have to give to the bank. This means paying off your mortgage is better than just your interest rate, and it grosses up on average at the moment to be about a 6% Return on Investment.

So whats the alternative to home ownership? Renting of course. Getting creative with housing and accommodation and ‘house hacking’ is a fantastic way to save money and get ahead. Do the sums for your situation, and have a look at the difference between home ownership and renting, factoring in everything and see what comes ahead.

Either way, if you have a mortgage then now is great time to get ahead and pay it down whilst interest rates are low. They will eventually rise, increasing your mortgage repayments and potentially leaving you underwater and unable to afford the home – guess what happens to all your peace of mind and security then? It goes out the window as the bank forecloses on the loan and repossesses your home!

If you are looking for great ways to invest $20K, then have a think about using a portion of it to pay off your mortgage, or at least, have it in an offset account that reduces the amount of interest payable on the loan. On average, that’s like receiving a guaranteed 6% return on investment!

Of course, this is a lead-in discussion, because some might argue its better to hold a mortgage at a lower interest rate as borrowing cash is cheap at the moment, and to instead invest that 20K…

Invest your 20K

So with those important previous considerations out of the way, how can you invest $20K in Australia…

Tax advantage retirement account: Superannuation

road trip
Its a long road to preservation age

The first step for anyone looking to invest is in Australia is to consider their superannuation. This is a tax advantaged account where contributions and growth is only taxed at the special rate of 15% vice your marginal tax rate which is likely to be significantly higher. Once you reach preservation age and enter retirement, your superannuation is usually tax free!

At the moment you can concessionally contribute (make tax free contributions) up to $25,000 per year for individuals. You can even contribute to your spouses superannuation, and there are a heap of funky and awesome rules and loopholes that the ATO allow.

The reason super is so powerful is because of compounding interest. Because you cant touch it for so long, and the gains are not being taxed as heavily as if they would be in a traditional taxed investment vehicle, where they are subject to Capital Gains Tax and personal income tax. The downside? Your investment is locked up until you retire, which isn’t great for those wanting to retire early.

Index funds

laptop
Index funds are for those who enjoy simplicity and peak performance. Technology does the work!

Total Stock Market Index funds. This is one of my preferred investment vehicles, and I discuss this in depth in many articles on this blog. Whilst the stock market goes up and down, over time it maintains its inevitable march northward, rising on average by 10% per year.

Of course, inflation eats a chunk of this away, making the nominal inflation adjusted return about 8% per year. You should be very very happy to get this rate of return, especially for the ease and total passive nature of index investing.

There are a number of super simple and easy to use passive index investment vehicles such as Vanguard and Betashares ETFs, which are Exchange Traded Funds, or parcels of shares that contain a portion of one of each stock weighted by market cap. You can read more about the specific ETFs I invest in A200, VTS and VEU and how they work on this blog, or check out my overview here.

Listed investment Companies

Outsource your financial decisions to a company, let them do the work!

Listed investment companies or LICs are companies which are established purely to manage money for people. These are considered actively managed funds, however I would only ever invest in the old school ‘Grandaddy’ LICs which are quite conservative and don’t tend to vary their investments from the index too much.

I invest in the Australian Foundation Investment Company, Milton, Brickworks and Argo. Be warned, some Listed Investment Companies have massively high fee’s, so I stick to ones with very low Management Expense Ratios, conservative management and a long track record of increasing dividends to shareholders.

Managed funds

Ready for another slap in the face? Yeah. Well here it comes *SLAP*

Managed funds are mostly all a scam. I used to invest in managed funds thinking it was the right thing to do, but I received a piddly return of around 4% annualised. All the while the fund managers and banks greedily pocketed the rest! Even if they invested my money into index funds, they could scam me out of 6% of my money every year!

luxury
Managed funds help fund managers afford luxury items, like this Yacht. They mostly screw you, though.

Managed funds or mutual funds prey on the financially illiterate and the lazy, and separate them from their wealth through excessive fees, dodgy deals or conflicts of interest, and poor financial investments. I would even go so far as to even say that most financial advisers and fund managers ALL have a conflict of interest. Our government regulatory bodies should not let them put their hands on your hard earned money.

Managed funds or mutual funds prey on the financially illiterate and the lazy, and separate them from their wealth through excessive fees, dodgy deals or conflicts of interest, and poor financial investments. I would even go so far as to even say that most financial advisers and fund managers ALL have a conflict of interest. Our government regulatory bodies should not let them put their hands on your hard earned money.

Directly investing 20K in individual company shares

*SLAP* it happened again!

stocks
Stock pickers do battle with Bear and Bull markets

What makes you think you can pick stocks? Did you know that 87% of the worlds most ‘Highly educated, sophisticated and professional’ fund managers managed to under perform a basic total stock market index fund due to trying (and FAILING) to pick stocks. Whats worse yet, these slick talking fund managers usually then slap on extra fees and charges for the privilege of gambling with your money.

The lure of some of those 3,4,5,10x stocks is strong isn’t it? Wouldn’t you have liked to own Apple, Coca-Cola, Google, Microsoft, or Tesla and participated in their meteoric rise from IPO? Well history tells us about the winners, but often we forget about the losers. Just like how a gambling addict only brags about his or her winnings, you never hear about all the losers.

If you want to go ahead and directly invest some of your $20K in directly owning company shares, then go right ahead. But you’ll note its a massive headache, its hard to administrate and over time you will earn less money than if you had just stuck with an ultra low fee total stock market index ETF. I hope you enjoy stressing about that specific companies earnings, profits and sales, reading their financial statements and shareholder letters… Talk about putting your eggs in one basket…

You might work for a company that offers you bonuses or some payment in company stock. This is great, but what I would personally be doing is selling this on the down-low and using the money to buy index funds.

Investment property

Melbourne
People have to live somewhere, right?

Aha, but I thought you said a mortgage was dumb? It depends. A tax deductible interest only loan on a cash flow positive investment property in a strategic area is not dumb at all!

Actually, in this instance, I wouldn’t be wanting to pay off this mortgage debt at all – because it is making me money! This is what I am chasing with IP1 and why I am building a small affordable living duplex. I will secure long term tenants, and enjoy a cash flow positive investment that puts money back into my pocket.

The downside? You might need more than $20K to begin investing in property. To make a deal work, you generally need to have at least a 20% deposit saved. Whilst there are some fantastic value properties out there across Australia, generally your probably looking at $200K+, so you’d want somewhere around $50K to seal the deal and provide a buffer for emergencies you could keep in an offset account

If your dead keen on investing in property and cant quite afford to do this yourself, Check out a Real Estate Investment Trust – or a REIT. There are a number listed on the Australian Stock Exchange.

Peer to Peer lending

Peer to peer lending is a form of junk bond. A bond is a contract for fixed interest, like a loan. Except in this case, your the creditor and not the debtor; its like a reverse credit card. Realistically though, they are considered fairly risky and you can probably only get about 5-7% investment returns from these, which of course you’ll need to declare and pay income tax on. The Australian government’s Money Smart website has a great article on P2P lending and whether it is right for you.

Summary

So there you have it, my take on how to invest $20K in Australia. My final parting words – if your thinking of withdrawing from your super due to the COVID-19 superannuation release package, think long and bloody hard before doing it. I would suggest this is only a good idea if you physically need it to buy food and rent to make ends meet, or alternatively to pay off any ridiculous loans like credit card debt or high interest personal loans such as car loans.

Withdrawing it to pay off your mortgage… to me I think just isn’t worth it, you’ll miss out on massive compounding gains it would otherwise get inside the tax shelter of super. Taking it out of super purely to invest OUTSIDE of super seems silly since its the same asset just now your paying a butt load more tax. Potentially for hardcore FIRE seekers who have ridiculously high super balances due to decades of additional salary sacrifice contributions then it might be a consideration. But for most of us, probably don’t touch it hey!

CaptainFI

6 thoughts on “How to invest 20k in Australia

  1. Hi Captain FI. Just came across your page and IG account. Have to say your content is brilliant! Between you, and Dave at Strong Money, you give me some great reads when needing a FIRE hit. Love your work, so please keep it coming. With gratitude, Sarah G

  2. Hi Captain FI,
    Like Sarah, I’ve just discovered your blog too. I’ve been reading a lot about investing for passive income, and eventual FI lately. I’m reading SMA, Pat the Shuffler and Aussie Firebug among others, and am fascinated by the different journeys you have all been on. Thank you for the inspiration!
    We’ve recently started our investment journey with a couple of LICs, and intend to purchase our first ETF next time we have saved enough to make another purchase. Initially, we liked the LIC strategy, then read more and liked the ETF strategy. So we’ve settled on the “why not both?” strategy – partly because we think it will work for us, and partly because we can see advantages and disadvantages both ways, and we want in on both sets of advantages!
    We will include international ETFs eventually, but are just starting with Aussie ones to get the dividend ball rolling! Very excited for our first dividend season in Aug/Sept 🙂

    1. Hey Miranda – Yep I am definitely on both sides of LIC and ETF, but really loving the LIC company structure so it isn’t forced into a liquidity trap situation that ETFs can get because of their trust structure. Peter thornhill gives out some absolute awesome bits of information on The aussie Firebugs podcast interview with him, which makes me lean into camp LIC. But then the returns and low fees of ETFs are so competitive – why not both!

  3. Great content here mate. Always a good read. I love your take on actively managed mutual funds. I share the same sentiment.

    Keep punching out these great blog posts. Looking forward to more.

    Blake.

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