finance

'Imagine electronic piggy banks.' A dummy's guide to investing, starting with just $100.

Having money in a savings account always makes sense. 

It gives you access to emergency cash, and your money is very safe. But that security can work against you. The returns on cash are very low, so it’s not a way to make your money grow. And that’s what investing is all about.

The thing about investing is that it’s easy to assume you need to be wealthy to get started. Nothing could be further from the truth. In fact, it works the other way around. You build wealth by investing. What’s more, you can be a successful investor with just $100 a week.


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Compounding returns do the heavy lifting 

What’s so exciting about investing is that even small amounts can make a big difference to your wealth over time. And it’s all thanks to the magic of compounding returns. 

Compounding happens when you re-invest returns, so that you start to earn money on your initial investment plus previous returns. 

It can be a very powerful force, and with the benefit of compounding under your belt, your investments can grow exponentially over time.

To see how impressive the effects of compounding can be, let’s say that from age 20, Olivia tucks $100 into an investment, earning 6.5 per cent annually. 

Sure, it’s a very small sum, but she backs it up by adding $100 to the same investment every week.

For the first few years, Olivia’s investment hums along, growing mainly through her $100 weekly contribution. 

But she reaches a point where compounding kicks in, and from there her wealth skyrockets as the returns on her investments start to make up an increasingly large proportion of the value of her investment.

After 10 years, Olivia will have contributed $48,000 of her own money – but her investment will be worth $67,726. 

After another 10 years, when Olivia hits the 20-year mark, she will have tipped in $96,000 – but her investment is worth more than double this, at $197,231. 

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By the 30-year anniversary, Olivia will have contributed $144,000 to her investment, which is now worth $444,868 – over three times the value of her contributions.

This exponential increase in the value of Olivia’s investment over time is all thanks to the power of compounding. 

It can take time for compounding to work its magic. The sooner you start, the sooner compounding can begin to do the heavy lifting and grow your wealth for you.

Let’s take a look at some of the options for investing, when you want to start small.

Micro-investing apps 

When you don’t have a lot to invest, micro-investing apps can make it easy. 

They work like electronic piggy banks, letting you invest very small sums in the share market, the property market, even global asset markets. 

There are a number of micro-investing providers (or ‘platforms’) to choose from, so let’s look at the more established options to understand what’s involved.

Raiz

Raiz lets you grow your investments through lump sum deposits, regular deposits or by rounding up the loose change on purchases made with a linked credit or debit card. 

There is no minimum amount needed to open a Raiz account, but your money will only be invested once your Raiz account reaches $5.

Raiz offers a menu of seven ready-made portfolios. They range from conservative (least risky) to aggressive (most risky) as well as a sustainable investing option, and one portfolio that offers small exposure to Bitcoin.

The cost: Most Raiz portfolios charge a flat fee of $2.50 per month, which adds up to $30 annually. Once your investment grows to $10,000, you’ll pay fees of 0.275% annually.

FirstStep 

FirstStep works in much the same way as Raiz, although only $1 is needed to open a FirstStep account. 

A point of difference is that FirstStep lets you set personal ‘rules’ for investing based on your spending habits. For example, you may set a rule of automatically investing $10 every time you order Uber Eats.

FirstStep offers a choice of three core portfolio options, again made up of exposure to various ETFs.

The cost: Expect to pay $1.25 per month ($15 annually) for accounts under $5,500, or $1.95 per month if you set up a regular direct debit from your everyday account into FirstStep. Once your account balance tops $5,500, the fee rises to 0.275% annually.

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The verdict: Raiz and FirstStep aren’t the only micro-investing apps, but the benefit of both these apps is the ability to start small and add to your portfolio over time.

A key issue to be aware of is that you do not directly own the underlying assets. 

What you are doing is investing in a fund managed by either Raiz or FirstStep, which pools your money with that of other investors, then spreads the money chiefly across various ETFs (in some cases with a smattering of other investments). 

It is important to know what you’re signing up for because ETFs charge their own fees.

The direct fees charged by these micro-investing apps are small in dollar terms. 

However, as an investor you need to look at fees as a percentage of your investment. 

This is important for two reasons. First, it lets you make an apples-for-apples comparison of the cost of different micro-investing platforms. 

Second, it shows how much your investment needs to earn so that you can pocket a decent after-fees return.

Commsec Pocket

CommSec Pocket is another micro-investing app but it works a bit differently in that you directly own the underlying investments. You can invest in a choice of seven ETFs with as little as $50.

The cost: Each time you trade using the app, you’ll pay just $2, though trades worth over $1,000 cost 0.20% of the trade value. For example, a $1,500 trade will cost you $3. This is far less than you would pay for regular online broking, which can cost around $15-20 per trade.

As with Raiz and FirstStep, the ETFs you invest in charge their own underlying fees.

There is a potential hidden cost with CommSec Pocket. 

You’ll need to open a Commonwealth Bank transaction account to use CommSec Pocket, and the CommBank Everyday Account comes with a $4 monthly fee. This cost can be avoided if you deposit at least $2,000 into the account each month.

The verdict: CommSec Pocket has a lot going for it if you’re starting out small. The drawback is that you’re limited to ETFs that you can buy into with just $50..

As always, it pays to look at CommSec Pocket’s fees. They may be small but they can add up. 

If you were to invest $100 each week – a total of $5,200 in a year – you’d end up paying brokerage of $104 over a 12-month period. If you used a regular online broker charging, say, $15 per trade, you could make four trades of $1,300 each quarter, and end up paying $60 in brokerage, and still have the same amount invested at the end of a year.

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Why fees are so important when you’re starting out small 

No matter how you choose to invest, whether it’s through small change on purchases or regular payments, the thing to watch out for is fees as they can easily eat into your investments.

The bottom line is to keep an eye on fees – not just the dollar value, but what they work out to as a percentage of the money you have invested.

ACTION PLAN 

  • Think about what you would like to invest in and look at the platforms that give you that option.
  • Take a closer look at the available investment options and how they have performed over the long term.
  • Find out all the fees that may be charged. For example, are there any underlying fees such as an ETF management fee?
  • Develop an understanding of how it works and make sure it suits your needs.
  • Find out what is involved if you want to sell your investment.

This is an edited extract from Ditch the Debt and Get Rich (Are Media Books, RRP $29.99) by Effie Zahos.

Image: Supplied.

Effie Zahos is one of Australia’s leading personal finance commentators, with more than two decades of experience helping Aussies make the most of their money.

A regular money expert on Channel 9’s Today Show and on radio around Australia, Effie is also the author of The Great $20 Adventure, and A Real Girl’s Guide to Money: From Converse to Louboutins.

Effie was editor of Money magazine until 2019, having helped establish it in 1999, and is now Editor-at-Large at Canstar.

Effie sits on the board of directors for Ecstra, a not-for-profit organisation committed to building the financial capability of all Australians, and low-fee digital investing platform InvestSMART.

Feature Image: Getty.