Ah, passive income, the promise of magical money.
You’re probably like me, wanting to understand the terms ‘wealth’ and ‘investing’.
How does everyone else have this investment thing figured out?
Let’s do a bit of research and look into investing!
Disclaimer, I’m not a financial advisor, seek professional financial advice, this is for entertainment purposes only. This is primarily for Australian citizens; research your countries tax and investment-related laws respectively.
Investing is storing your cash in a different container to increase its value.
Cash and its value are separate; $1 AUD can have a value of $0.80 USD. Your single dollar has two values depending on the container it’s stored in.
Containers, a.k.a. accounts, funds or assets include property, stocks, shares, commodities (gold, silver), crypto, international currency etc. The default container, a local bank account, stores money in your regions currency, e.g. AUD.
The problem leaving all your cash here is its value lowers due to inflation. Inflation is a global issue; governments print more money and rates rise forcing increased prices for goods and services. This all makes the value of our cash lower as we need more cash to pay for everything.
An example is the price of Coffee! It used to be a few dollars for a cup of joe, now it’s significantly higher for some hot water and ground beans. That’s inflation at work.
This is why we invest or store cash in different containers a.k.a. accounts or funds. Having a variety of containers is known as a diversified investment portfolio or wide asset allocation.
You need a good investment strategy to avoid inflation, increase the value of your money and cast a wide investment net.
But first, where are you, financially?
Your Current Wealth
Wealth or net worth is the total amount of your cash and investments. Open your banking app and if you already have investments, try WeMoney or Finder to easily combine multiple accounts into a single dashboard.
The biggest impact on your wealth is your income, that is, how much money you make. Be aware as tax and super also affect this.
Tax is money paid to governments so our country can operate. In Australia, there’s GST (Goods and Service Tax) on purchases, income tax, capital gain and a lot more. Superannuation (Super) is the retirement fund issued by the government handled by a third-party super fund or yourself.
Either you’re self-employed or you’re employed by a company. Either way, you need to total your annual income.
To navigate your payslip:
- Disbursements: payment to funds like Super.
- Gross: your income before expenses aka before-tax.
- Net: remaining amount after expenses aka after-tax.
An example of annual income: Gross amount is $76,102.00, take tax owed $16,796.00 which equals Net amount $59,306.00. Then take Disbursements of $2,891.98 out and you get the actual Banked amount of $56,414.02. And Employee Super is on top of $8,789.82.
Your income is the most important factor to a good investment lifestyle, so in saving that, income should be your focus. Mr. Money Mustache says to increase “your savings rate as a percentage of your take-home pay.”
It’s not about how much you earn, but how much you can save and invest from your earnings. A healthy savings mindset is a lifestyle. Assess what you have and see what changes you can make to increase how much you put away.
Create a simple budget spreadsheet to track everything, try Daniel Inskeep’s Budget Tracker. For more assistance with savings, I recommend The Barefoot Investor by Scott Pape.
John C. Bogle, an investing legend (more on him later), follows this simple philosophy:
- Keep investing.
- Time is your friend.
- Impulse is your foe.
- Stay diversified.
- Stay the course.
Now the fun stuff, investing hoo-ha.
There’s a lot of different investment strategies out there. Do your research before transferring your hard-earned money anywhere!
For passive investing, we’ll be using Dollar-Cost Averaging (DCA), a low risk, less volatile strategy.
DCA is long term which rewards your time in the market over timing the market. Meaning, you’ll regularly invest cash no matter the ups and downs.
Historically, the market as a whole rises, so the longer you invest in proven containers the better results you’ll most likely get from compound interest.
Warren Buffet, the famous investor, ran a 10-year bet to prove the DCA strategy. And ahead of schedule, he won the bet which proves to stay in the game longer, works!
So, how do you get started?
Step 1, have your emergency fund, i.e. enough cash for 3-6 months to live. Multiple 1 month of living expenses by 3 and 6, add 5-10% on top as a buffer. Leave it in your default container, your bank account.
Step 2, set some clear, focused goals, e.g. $100k or $100k-$200k to put toward a house. If you pair it with a strong, emotional purpose, you’re more likely to stick it out.
Step 3, assess your financials. Know your income and outgoings to find the perfect weekly/monthly investment amount.
Step 4, set a timeframe, i.e. the length of time you want to invest for, factoring age and objectives, typically 5-7 years as that’s one market cycle. And the amount of time available to manage investments week to week.
Step 5, assess your risk, i.e. the willingness to risk losing money to generate a potentially higher return over the life of your investment. Be aware of behavioural traps and greed! Don’t let emotions get the better of investment opportunities. Pride, emotional attachment and loyalty are dangers for investing.
Let’s store cash in stock containers.
A stock is a portion of a company, as the company grows the stock prices rise making our cash more valuable.
We’ll invest in shares via the stock market.
The stock market is the globally connected database organising all of the stocks for publically traded companies. Each country has their own Stock Exchange, in Australia, it’s the Australian Stock Exchange (ASX).
Instead of a single stock in a single company, let’s look at Index Funds. Index means a group of companies, and Fund means an account of money. For example, the S&P500 Index is a Fund for the top 500 companies in the US.
So by investing $1, it will be split among 500 companies. You’ll own a small percentage of a small share of lots of different companies. Cool, hey?
Ali Abdaal’s Ultimate Guide to Investing in Stocks says to invest in index funds. Ali says it’s “the best way to invest in the stock market.” Daniel Inskeep’s Invest First $1,000 and Long-Term Stock Portfolio mentions ETFs (Exchange Traded Funds) are great. Andrei Jikh’s Revealing Investments, Start at 20, Retire by 30 and How Much Money Should I Invest are all worth exploring.
To invest in stocks, you need a stock broker.
A broker acts as a middle-man between you and your countries stock exchange. These days, this is all automated with programs and software, there’s no human middle-man.
Think about it like buying a laptop. You don’t go directly to a factory where it’s made, instead, you go to an online/physical retail store. There’s an increase in the laptops price from the retailer as they make the purchase process possible.
Like retail stores, there are many stock brokers to choose from, all with pros and cons. Two factors to consider are 1) the ability to invest in Index Funds or ETFs and 2) having low fees.
Do your own research with terms like “best stock broker in <your country>”. Here’s Every ASX Stock Broker Comparison for you fellow Aussies.
For Index Funds and ETFs within Australia using dollar-cost averaging, the Vanguard Personal Investor platform is a good option, however, I recommend Pearler, see Vanguard vs Pearler for more. Vanguard Group is the second-largest investment firm in the world. Founded by John C Bogle, who’s credited with creating the first index fund.
Okay, so how much do you transfer?
Your first investment is daunting, but it’s up to you and your financial circumstances. Vanguard allows a minimum of $500 trades, so that’s your floor, you can only go up.
They integrate with Osko so set up automatic transfers for something like $125 per week (if you can) for $500 at the end of each month. Keep a steady investment habit whatever the amount is.
Picking Index Funds
What index funds do you pick?
There’s a lot of different Index Funds to choose from, even from one Stock Broker.
Do your own research with terms like “Best Vanguard Index Funds”.
To start, look at 1) Vanguard Australian Shares Index ETF (VAS.ASX) and 2) Vanguard MSCI Index International Shares ETF (VGS.ASX). The VGS is similar to the S&P500 mentioned earlier.
David Quan’s Low-Cost Index Funds and Sanjee Sen’s Favourite ETFs show these are worth exploring.
Long Term Thinking
Dollar-cost averaging rewards steady, long-term investing, perfect for your passive income dreams.
While crypto rises and crashes, you’ll slowly feed your Vanguard account and smile.
With the extra time you have, keep learning from the best. Read The Barefoot Investor and use resources like Vanguard’s blog: Don’t just plan for retirement; Plan for your life and /r/learnfire’s members: 1 Million Mark or Prioritise Spending. Also, try Profitful Investing Community and the Morning Brew.
🚀 Strategy: Dollar-cost averaging.
⏱️ Timeframe: 5 years.
- Lower paid tax.
- Invest Super more aggressively.
- Earn at least x4 amount invested stocks from index funds.
💰 Financial Position (annually):
- Income: $76k pre-tax, $56k post-tax.
- Outgoing: ~$36k
- Cash Savings: ~$10k
- Super: ~$10k
💡 Emergency Fund: $12-16k
⌛ Investable Time:
- 10-15mins per month.
- Ideally full automation.
⚠️ Risk Tolerance: Low.
Day Trader Experience
For a wider perspective, I phoned a family friend.
He’s a day trader and treats the stock market as a job. His focus is the resource/material sector like gold, oil and gas.
His advice is to find a sector you enjoy learning about in order to understand when stock prices rise and fall. It took him 15 years to comfortably bid and sell lots of money as he now understands what’s happening in his sector of choice.
Starting out was stressful he explained, he had many sleepless nights worrying about the latest investment and if it would pay off. He’s now recovered his losses and earned a lot more money, but he still warns to be very careful.
Day trading is a high risk, needs a large amount of time and requires insight from experience.
He explained managed funds is a great starting point compared to self-managed. He also mentioned Captial Gains Tax, the “difference between what it cost you to acquire the asset and what you receive when you dispose of it.” And how it halves over a years time, so hold on to investments for over a year! He also explained something called Medium Terms, which I didn’t understand, will look it up soon.
It was a great conversation that shows investing is different for everyone.
What a ride! I wish you the best on your investment journey and hope this helped in some small way.
Email or tweet me if you’d like to share your journey, I’d love to see it!
Thank you to:
- Ali Abdaal
- Daniel Inskeep
- Andrei Jikh
- David Quan
- Sanjee Sen
- My family friend
Next up… crypto, real-estate or maybe single stocks and shares, stay tuned!