How to invest $5,000 in Australia
There are plenty of options for savvy investors.
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So you've got $5,000 saved up and want to know what you should be doing with it? You've come to the right place.
What's in this guide?
- Compare investment and trading accounts
- Should you invest your money?
- What are my options if I want to invest $5,000?
- How else can I profit from $5,000?
- How do I compare investment products?
- What are the pros and cons of using a savings account?
- What are the risks of investing?
- Is there anything else I should consider?
- Frequently asked questions
Important: Share trading can be financially risky and the value of your investment can go down as well as up. “Standard brokerage” fee is the cost to trade $1,000 or less of ASX-listed shares and ETFs without any qualifications or special eligibility. If ASX shares aren’t available, the fee shown is for US shares. Where both CHESS sponsored and custodian shares are offered, we display the cheapest option.
Trading CFDs and forex on leverage is high-risk and you could lose more than your initial investment. It may not be suitable for every investor. Refer to the provider’s PDS and consider the risks before trading.
*Past performance data is for the period ending December 2020.
Disclaimer: Performance, fees and insurance data are based on each fund's default MySuper product. Where the performance, fees and insurance data for the MySuper fund vary according to the member's age, results for individuals between 40-49 years of age have been shown. This article is general advice. You should consider your own personal circumstances before deciding if a superannuation product is right for you. Superannuation is a long term investment and past performance is not indicative of future performance.
Should you invest your money?
When it comes to investing, it's important to understand that there's always a risk versus reward payoff. For example, keeping your money in a bank account offers security, but your return on investment is very low or zero. You're barely beating the rate of inflation!
Your other option is to invest outside of the bank, such as in shares, ETFs or superannuation.
What are my options if I want to invest $5,000?
Learning about various investment alternatives is important because of the different levels of risk involved, as well as commissions, fees and minimum deposits to think about. We share some of your main options below.
Pay outstanding debt
First things first – if you have any debt, it's important to pay it off before you think about investing. This is because the interest you're charged on debt is very likely to be higher than the returns you can achieve through investing.
Contribute to your superannuation
Contributing to your superannuation fund can be a great idea, provided you're happy to have the money locked away for a long time. The best reason to top up your super is that you can avoid paying your usual income tax.
Any contributions you make to your super straight out of your salary is only subject to 15% tax. If you make contributions from post-tax income and earn less than $50,564 per annum the government matches your donations and this money adds to your super as well.
Managed funds + ETFs
Investment funds allow you to invest in a portfolio of stocks and other assets such as gold or property. Instead of building an investment portfolio yourself, you benefit from the expertise of fund managers.
Not all investment funds are successful, so before you invest, it's important to do your research and understand what kinds of fees you'll be charged and how the fund has performed historically. Most managed funds have a minimum investment of $10,000+, whereas ETFs have a $500 minimum investment – so for a $5,000 deposit, an ETF might be your better choice.
Although riskier, the stock market historically offers better returns than bank accounts. By buying shares, you’re essentially owning a small portion of the company. If the company generates profits, you stand to earn dividends, and you can also benefit from an increase in share prices.
The minimum initial investment in Australian shares is $500, so you can invest in one or multiple companies with your $5,000. Meanwhile, US stocks have no minimum investment requirement, so you can start investing as little as a few dollars into stocks if you choose, depending on your stock broker.
Robo advisors are platforms or apps that automate your investments. Typically they provide a list of stock or ETF portfolios for you to choose from, and you can deposit a few dollars at a time or thousands of dollars if you prefer. Head to our robo advice homepage for a list of robo advisors in Australia.
Peer to peer (P2P) platforms allow you to lend your money to everyday borrowers in exchange for a fee. The lender is typically offered an interest rate on the amount they've deposited which varies depending on risk level and the P2P platform itself.
Minimum deposits range from as little as $10 up to $10,000, and the return that you can expect is normally a fixed rate. Head to our P2P homepage to find out more and compare your options.
Term deposits and high-interest savings accounts
Anyone looking for guaranteed returns can consider setting money aside in a term deposit or a high interest savings account. While a term deposit requires that you put your money away for a chosen time period, high interest savings accounts offer easier access to funds.
How else can I profit from $5,000?
Other high-risk options are not so much 'investments' as trading. This is because when you trade in markets such as forex, CFDs or futures, there's a very high possibility that you'll lose your money. In the case of CFDs and forex, most customers lose their money – so in some ways, trading can be more like gambling.
As always in investing, the higher the risk, the greater your potential to make a big return. If you're willing to take on the risk, below are some of the options you can choose:
Options are contracts that let you buy or sell underlying assets at specified prices on specified dates, without actually having ownership. The time period they remain valid for can vary from a few weeks to a few months. Investing in options requires that you learn the tricks of the trade well, failing which you can lose money.
You can benefit by investing in futures through considerable leverage. With $5,000, you can control a futures contract worth around $75,000, but needing access to additional cash if there’s a margin call can be a problem. Besides, the end result can be you losing more money than you’d started off with.
Trading foreign exchange
You can benefit through leverage by trading currencies in the forex market, but you can also suffer significant losses. Similar to the futures market, leverage allows traders to make a significant amount of money from small initial investments in exchange for the risk of losing it all. Head to our guide on forex trading to find out how it works.
How do I compare investment products?
- Minimum amount requirements. If you want to open a term deposit the starting point is usually $500 or $1,000. In the share market, you must initially invest at least $500 in Australian companies and you can start from as little as a few dollars when you buy US stocks.
- Fees and commissions. Fees vary across different products. If you’re planning to invest in shares or ETFs, expect to pay some kind of brokerage fee. High interest savings accounts and term deposits tend not to charge any account keeping fees.
What are the pros and cons of using a savings account?
Putting your money into a savings account won't get you the high returns you might want, but it's a good choice if you need to access the funds within the next 12 months or so. Here are some of the main pros and cons.
- Government guarantee. The Australian Government Guarantee Scheme provides security to deposits of up to $250,000 per person per institution, and you can fall back upon this scheme in case your financial institution has trouble honouring your deposit. To make the most of this scheme, you can consider banking with multiple institutions when cumulative balances in any one institution cross the $250,000 mark.
- Guaranteed returns. Putting your money in a savings account is a safe bet because you’ll continue to earn a standard variable rate for as long as you keep money in the account. Online banks tend to offer better rates than conventional banks because they benefit through reduced overhead costs. Credit unions also offer competitive interest rates because they don’t have to share profits with shareholders. If you choose the right account and play your cards right you can even earn bonus interest.
- Cater to different needs. Features that savings accounts come with can vary from one offering to the next, allowing you to choose an account as per your needs. If you want 24/7 access to money in your account, pick one that provides free access to online and phone banking. If you want to use money in your account to pay bills, you can find an account that provides BPAY access.
- Inadequate returns. Savings accounts in Australia tend to offer interest rates between 0.5% and 2.5%. These rates are lower than what you stand to make through other means of investments.
What are the risks of investing?
- Limited information. A little research can go a long way in the world of investments even if you’re putting your money in a seemingly simple asset like a term deposit. This is because not all financial institutions offer the same interest rate. When dealing with more complicated assets like shares and futures, learning the intricacies becomes all the more important.
- Fees. When you invest your money, you’ll use the services of a financial institution or a broker, or both. Before you begin any such relationship, take the time to find out how much you may have to pay as fees in different situations.
Is there anything else I should consider?
- Risk. In most cases, there is a direct link between the risk your investments face and the returns they generate. If you’re looking at greater potential returns, it is only natural that you should prepare to take higher levels of risk. However, risk perception can vary and does not have a necessary bearing on statistical analysis.
- Risk profiling. Your willingness to take risks coupled with how it can affect your judgement translates into your risk profile. By going through the process of risk profiling you address aspects like risk capacity, risk required and risk tolerance, and this helps you arrive at optimal investment risks.
- Financial goals. Setting financial goals is crucial but you should be able to measure how you’re doing as and when required. When planning for retirement, calculate just how much money you’ll require when the time comes.
Frequently asked questions
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