Getting started with investing can seem intimidating, especially when you’re young and just beginning your financial journey. However, with some guidance and smart planning, young Australians can absolutely begin investing, even with limited funds. In this post, we’ll walk through the basics of how to start investing in Australia as a young investor, and provide tips tailored specifically to the Australian market.
Note: The content below is just general principles of investing and are not considered investment advice. A licensed financial advisor is authorised to provide you with specific financial advice.
Why Start Investing Young?
Investing at a young age sets you up for long-term growth and success. Here are some of the key reasons to make investing a priority early on:
Compounding Returns
The earlier you start investing, the more time compound interest has to grow your money. Even small, regular contributions can snowball into significant savings over decades. Getting started in your 20s versus your 40s can make an enormous difference.
Flexibility
When you’re young, you likely have fewer financial obligations. This means you may have more flexibility in your budget to put money into investments. As life progresses and expenses increase, investing spare cash can become more difficult.
Learning Curve
Like any new skill, investing has a learning curve. Starting early gives you years to educate yourself, make mistakes, and develop effective strategies that work for your goals. Rushing to learn investing close to retirement can be stressful.
Risk Capacity
The general rule is the longer your investing timeline, the more risk you can accept. Stocks tend to outperform bonds over long periods, for example. With decades ahead, young investors can better weather the ups and downs.
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How to Actually Start Investing
Ready to begin your investing journey? Here are practical steps to get started even with limited funds:
Save an Emergency Fund
Before investing, build a cash emergency fund with 3-6 months of living expenses. This provides a cushion for unexpected expenses and job loss without needing to sell investments at a possible loss.
Pay Down High-Interest Debt
Credit card or payday loan debt can negate any investing gains. Develop a plan to pay off high-interest debt before putting extra money into the market.
Open a Retirement Account
Tax-advantaged retirement accounts like superannuation allow your investments to grow tax-free. Contribute at least enough to get any employer match if available. Consider increasing the contributions to match the annual contribution limit.
Choose Investments
Selecting investments that match your strategy and risk tolerance is key. For beginners, low-cost diversified index funds that cover the whole stock market reduce risk. Exchange traded funds (ETFs) and managed funds are popular index fund options.
Start Small
Many online brokers allow you to invest small sums like $100 or less. This makes investing attainable even if you don’t have thousands to start with. Invest what you can consistently set aside each month.
Manage Emotions
Don’t panic and sell when the market dips. Volatility is normal, and patient, disciplined investors who stay the course tend to do well over decades.
Tailoring Your Approach to Australia
While core investing principles are universal, applying them in Australia requires localisation. Here are tips for Aussie investors:
Superannuation Comes First
The tax perks and contribution rules make super your best investment vehicle. Maximise contributions under the concessional and non-concessional annual caps before investing elsewhere.
Consider Franking Credits
Australian companies attach franking credits to dividends, reducing your tax liability. Investing in Aussie stocks that pay franked dividends can benefit local investors.
Know Your Options
Beyond super, popular investments in Australia include ETFs, LICs (listed investment companies), index and managed funds, and direct shares. Research which approach best suits your strategy and comfort level.
Mind the Withholding Tax
Distributions from overseas investments can be subject to withholding tax, reducing returns. When investing globally, be aware of potential tax implications.
Seek Local Guidance
Australian investing resources and financial advisors can provide advice tailored to local regulations, super system intricacies and more.
Use Your Tax Agent
Tax agents can also provide valuable assistance. They will guide you through the tax implications on the types of investment structures or strategies you adopt, such as contributing to superannuation to take advantage of its concessional tax treatment.
When selling investments outside of super, they help calculate and include any capital gains tax obligations.
A tax agent serves as a resource to ensure investors understand tax rules, maximize deductions, minimize tax liability, and retain more investment returns over the long term. Their guidance makes a significant difference in long-term investment success for young Australians. Seeking tax advice early on can set you up well as your portfolio and finances grow more complex.
Final Tips for Young Investors
Investing early sets you up for success, but getting started does require some guidance. Here are final tips:
Educate yourself. Read investing books and blogs so you understand terms and strategies before putting down cash.
Start small. Invest what you can consistently afford, even if it’s only $50 per month. Small sums compound over decades.
Reinvest dividends and distributions. Opt to automatically reinvest your payouts from investments—this compound your holdings.
Review portfolio periodically. Check in on your asset allocation once a year or so and rebalance to your target if needed.
Develop good financial habits. Live below your means, avoid lifestyle inflation as income grows and consistently invest the difference.
Reach out for help. Professional help will set you up the right way, and with advice suited to your funds and circumstances will make a great impact overall. The key takeaway?
While investing can certainly feel intimidating as a beginner, you can absolutely start small, even in your 20s. Develop smart habits and learn investment basics now, and your future self with thank you down the road!