How To Put Your Money To Work For You: Beyond The Basics

Some people have serious financial problems, but that's not you, right?. You've got a regular savings account, have cleaned up your high-interest debts, have all your super funds consolidated, and all-around are in pretty good financial shape. So where do you go from here? What's the next step for those of us who know the basics but want to make our money work harder?

Picture by Mark Nolan/Getty Images

Mastering the fundamentals is the most important aspect of keeping your finances healthy, and it's important to focus on that. However, you can boost your personal portfolio in a number of ways after you've exhausted the basics of money management. That's what this post is all about.

Don't Jump The Gun: Make Sure Your Money Isn't Better Spent Elsewhere

Before you jump head-first into riskier financial waters, we need to make absolutely sure that you're really at the point financially where you have money to invest. J.D. Roth, editor of Get Rich Slowly, explained that before you start looking for new ways to invest your money, make sure you have the basics covered — and we don't just mean a single superannuation fund, a positive balance in your bank account, and nothing on your credit cards.

Before you venture beyond the basics, make sure you've hit all of the areas on this checklist first:

  • You have a budget. This may sound obvious, but it's important. Make sure that you have a budget and you're sticking to it, so you know at all times where your money is going, including this cash you want to save or invest.
  • You're saving for retirement. Your compulsory superannuation contributions are a good start, but you may well want to top them up. Before you start thinking about other things to do with your money, consider how much you'll need in retirement, and commit to contribute as much as possible to achieve those long-term goals.
  • You've paid off your debt. We're not just talking about credit cards here. Your money isn't really yours until you've paid off your other debt. Student HELP debt, car loans, mortgages: even if it's "good debt", your extra cash is better spent towards getting your net worth in the black before anything else.
  • You have an emergency fund. Usually 3-6 months of expenses saved up and stashed away, just in case.
  • You know how to save for life events and desired purchases. This means you know how to budget well enough to save for that new laptop you want, for your wedding, or for that dream holiday you've always wanted, without wrecking your budget or plunging into credit card debt to make it happen.

J.D explained that if you've hit all of the points above, you're ready to start thinking about intermediate savings, or taking that extra cash and putting it aside for other things. If you're not out of debt, or don't have a fully-financed emergency fund, you're better off putting your money there instead.

That can be daunting for a lot of people, because it implies you're better off paying off your mortgage or your student loans before you start playing the investment game or saving for luxury purchases. But there's no point trying other strategies if paying off existing debt is more effective.

Option 1: Use "Targeted Savings" To Save For Specific Goals

If you have the basics covered, it's time to do some brainstorming. What exactly do you want to do with this excess money in your budget? Do you want to stash it away so it makes you more money? Perhaps there's something you've always wanted — a specific model of car, or a holiday home? Maybe you want to start your own business, or start a charity? Whatever it is, J.D. calls these goals "targeted savings," which use dedicated saving accounts and automatic deposits to keep you saving towards specific goals. He explains that this allows you to name and prioritise what you're saving for, and you can easily monitor your progress at any time. Photo by Jeff Turner.

Whatever your dream is, J.D. suggests you find a higher-interest savings account for it, and start diverting that extra money to it on a regular basis. Your best bet is likely to be an online-only savings account; these often have a higher interest rate, and it's easy to set up automatic transfers. It's not as sexy as playing the stock market, but it uses skills you already have, puts your money to work for you, and most importantly, gets you where you want to go.

Option 2: Consider An Investment Property

Investing in property is a popular choice for many Australians. Negative gearing (claiming the interest on your mortgage as an expense against your income for tax purposes) means it can be a relatively inexpensive investment, especially if you get suitable long-term tenants). It's definitely a long-term strategy, however: variations in property prices and interest rates mean that it can take time to realise a gain. You'll also need to save up a reasonable deposit before getting started.

You need to budget and plan carefully for this strategy, and you shouldn't assume that it will automatically be a path to riches. Nonetheless, it remains a common choice, and it can seem less daunting than investing on other areas. On that note . . .

Option 3: Hire a Financial Planner and Sail for Risky Waters

Sometimes you have to spend money to make money, but a good financial planner can help you make smart decisions about other, more advanced options. Sure, a financial planner can help you make the smart saving decisions we've discussed up to this point, but that kind of advice is free — what you really want a financial planner or accountant's advice with are the tricky investment options, such as buying into shares or investment funds.

Option 4: Stop Worrying and Manage Your Current Investments Instead

There are plenty of options available if you're wondering if there's a way to make your money work harder for you, as you can see. Even so, the majority of us will have a hard enough time paying down our debt and putting together an emergency fund. We mentioned it earlier, but you shouldn't go running into the wilds of investment properties and the stock market until you're in sound financial shape. There's an old adage about gambling that applies here: "Don't play with money you can't afford to lose."

Lifehacker's weekly Loaded column looks at better ways to manage (and stop worrying about) your money.

J.D. Roth is the editor of Get Rich Slowly. He offered his expertise for this story, and we thank him.


Comments

    "Student HELP debt"

    Hmmm.....I'm free from debt on all accounts except for a HELP debt. Whilst I have the money to pay it out completely, my understanding was that the interest rate on the HELP debts is lower than what my money can earn me in a high interest savings account. As such I was under the impression that it's actually better not to pay out the HELP debt and instead keep my money invested.

    I've done a bit of reading around on this issue, i.e. should I pay out my help debt?, and there seems to be very conflicting views out there. I'd be very interested to see LifeHacker run an article on this issue to see what recommendations they draw.

      Agreed! And also what impact it might have if you were applying for a home loan?

        JonBOY & Harm: the advice below about lump sums etc is good, but the other thing to consider is that HELP debt gets deducted from your pay (if you are PAYG), so if you are applying for a loan of any kind you will be asked to prove how much you earn. Which will be less because of your debt.

        Paying off your uni debt gives you a 'pay rise', and the repayment scale is progressive so if you get promoted you get taxed more on your HELP debt. the thresholds are different to the normal tax brackets too, so you could stay in one tax bracket for income, but go up a HELP bracket.

        Pay off your HELP debt, and use the extra money from your pay to automatically go into a savings account. That way you won't even notice the missing money and you will be able to keep all future pay increases.

      What you should definitely do is pay it out before may 31st as a lump sum in the year your collected help tax money would normally pay it out. E.g if you owe $5k and over the course of the financial year you are contributing $100 a week extra tax at the end of that financial year you should just about pay it out. On June 1st however you will get hit with the CPI increase etc. if you pay it out on may 31st you get the lump sum benefit and don't cop the CPI increase AND you then get that $5k back with your tax return.

      Paul Clithero on Money said this when I was a kid and I remembered it until it came time for me to pay my HECS out a few years back.

    If you pay out your HELP debt, there should be a 20% discount on the lump sum you pay... doe it not work this way anymore?

    *does - ugh.

      If you pay it up front you used to get a 20% discount, with any further payments attracting a 10% discount. I know the government has been tinkering with this policy though so it may not apply any more.

      Either way, depending on how much you're paying back and how much debt you have left it's still worthwhile stashing the cash in a high interest savings account rather than paying it off for most people.

      JonBoy:
      You are correct: your HELP debt increases with the CPI, but most savings accounts have a higher interest rate than this so it makes sense to keep your savings in your savings account and only pay the compulsory HELP repayments. From what I gather, if you pay off more than $500 of your HELP in one go you get a 5% discount in your case, but I still think it's better to keep your money and only pay the compulsory repayments, as this way you have all your money for a rainy day and are still paying off your HELP slowly.

      Lauren:
      They recently changed the discounts. Last year if you payed off your entire HELP debt before your census date you received a 20% discount, and if you payed off at least $500 in one go after your census date you received a 10% discount. As of this year you get a 10% and 5% discount, respectively. So personally I don't think it's worth paying your debt upfront anymore; you may as well keep the money and accrue interest and just pay the mandatory repayments (which are means tested anyway).

        Quick point:
        - If you pay HELP debt off early you get 5% discount tax free
        - The best saving account with give you about 5.75%, but after tax that is closer to 3% for many people

        Pay HELP debt off just before end of year to get maximum benefit and avoid CPI increase.

          Thanks for all the replies people. The issue of whether or not to pay out a HELP debts certainly seems like a hot one. Even within this series of comments there a conflicting views.

          I think I'll start by calling up and finding out exactly what my outstanding balance is and go from there.

    Geez that's a tough introduction to investing. Buy a rental property and hope for the best. Isn't that speculative investment at it's worst?

      They were filling a gap from the US version of this article, which had something even less researched in it's place.

    If you are under 25 I highly recommend getting a 'first home buyers' account.
    You can only use it towards a home or roll into you super. The government contributes money (17%) on top of your contributions up to a maximum of $5,500 per year.

    Good value if you are working towards a home and you can't touch the money to spend it.

      +1
      I got one last year and am slowly but surely building up a deposit for my first home.

      Wow, I'd never heard of this type of account, and it seems you don't need to be under 25, but under 65.
      http://www.ato.gov.au/individuals/pathway.aspx?pc=001/002/066

      $5,500 per financial year, up to financial years, but you can do it in 2 years + 2 days. If you get in before this FYE, you can have the full amount matched by the government by July 2014.

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