Investing with She’s on the Money

1. Invest for your future self: Start early and make it a priority

"There were times I felt like I'd never be able to get ahead. But I did. Slowly but surely, I changed my mindset and habits through learning and by understanding what my money was being spent on and where I could save."

Compound interest is powerful. By investing early and consistently, you can harness the power of compound interest to grow your wealth significantly over time. Even small, regular contributions can lead to substantial gains in the long run. For example, investing $500 each month from age 21 to 60, with an average return of 7.5%, could result in a portfolio worth $1.25 million.

Overcome financial obstacles. Many people struggle with debt, low income, or poor financial habits early in life. However, it's crucial to recognize that these challenges can be overcome through education, discipline, and a shift in mindset. By prioritizing saving and investing, even in small amounts, you can build a foundation for future financial success.

• Start investing as early as possible
• Make regular contributions, no matter how small
• Focus on long-term growth rather than short-term gains
• Educate yourself about personal finance and investing

2. Understand your money mindset and risk tolerance

"When you live in harmony with your values, everything becomes easier. Aligning your money mindset with your values helps foster pride in your accomplishments."

Identify your money story. Your attitudes and beliefs about money, often formed in childhood, can significantly impact your financial decisions. Take time to reflect on your money story and how it influences your approach to investing. Understanding these underlying beliefs can help you make more conscious and aligned financial choices.

Assess your risk tolerance. Every investor has a unique risk profile based on their personality, financial situation, and goals. It's essential to honestly evaluate how much risk you're comfortable taking with your investments. This will help you choose appropriate investment strategies and avoid making emotional decisions during market fluctuations.

• Reflect on your childhood experiences with money
• Identify any limiting beliefs about wealth and success
• Take a risk tolerance quiz to determine your investor profile
• Align your investment choices with your risk tolerance and values

3. Build a solid financial foundation before investing

"Paying off debt is an investment in itself."

Establish an emergency fund. Before diving into investing, it's crucial to have a financial safety net. Aim to save 3-6 months of living expenses in an easily accessible account. This will protect you from having to sell investments at a loss in case of unexpected expenses or income loss.

Tackle high-interest debt. Prioritize paying off high-interest debts, such as credit card balances, before investing heavily. The interest saved by paying off these debts often outweighs potential investment returns. Once you've addressed high-interest debt, you can focus on building wealth through investing.

• Save 3-6 months of living expenses in an emergency fund
• Pay off high-interest debt aggressively
• Create a budget to track income and expenses
• Ensure you have adequate insurance coverage

4. Diversify your investments across different asset classes

"Diversification is key, and it's important to also know that when we diversify, we aren't only doing it to manage risk (although sometimes it feels that way!). When we diversify, we can actually reap greater rewards from our portfolios."

Spread risk across asset classes. Diversification involves investing in a mix of assets, such as stocks, bonds, real estate, and cash. This strategy helps minimize risk by ensuring that poor performance in one area is offset by better performance in others. A well-diversified portfolio is more likely to provide stable returns over time.

Consider geographic diversification. In addition to diversifying across asset classes, consider investing in different geographic regions. This can help protect your portfolio from country-specific economic or political risks and provide exposure to growth opportunities in various markets.

• Invest in a mix of stocks, bonds, and other asset classes
• Consider both domestic and international investments
• Use ETFs or mutual funds for easy diversification
• Regularly rebalance your portfolio to maintain desired asset allocation

5. Choose between active and passive investing strategies

"Dollar cost averaging is a strategy where you get to be a little bit less active, because you trust the market to do its thing."

Active investing. This approach involves actively selecting individual stocks or other investments in an attempt to outperform the market. It requires more time, knowledge, and often higher fees. While it can potentially lead to higher returns, it also carries more risk and may underperform the market.

Passive investing. This strategy involves investing in index funds or ETFs that track broad market indices. It's based on the belief that it's difficult to consistently outperform the market, so it's better to match market returns at a lower cost. Passive investing typically involves lower fees and less ongoing management.

• Active investing pros: Potential for higher returns, more control
• Active investing cons: Higher fees, more time-consuming, higher risk
• Passive investing pros: Lower fees, less time-intensive, broad market exposure
• Passive investing cons: Limited potential to outperform the market

6. Consider ethical and ESG investing for long-term sustainability

"I genuinely believe that we are all heading towards a place where we will expect ethical companies and ESG companies to be the norm. Imagine how great that would be."

Align investments with values. Ethical investing allows you to support companies that align with your personal values and beliefs. This can include avoiding industries you disagree with (negative screening) or actively investing in companies making positive impacts (positive screening).

ESG factors in investing. Environmental, Social, and Governance (ESG) investing considers a company's impact on the environment, its social responsibility, and its governance practices. Research suggests that companies with strong ESG practices may outperform their peers in the long run.

• Define your ethical investing criteria
• Research companies' ESG practices and ratings
• Consider ESG-focused ETFs or mutual funds
• Stay informed about evolving ESG standards and regulations

7. Maximize your superannuation for retirement security

"Super is the government's way of saying it's up to you to create your own secure financial future."

Understand superannuation basics. Superannuation is a tax-advantaged retirement savings system in Australia. It's crucial to understand how it works, including contribution limits, investment options, and access rules. Maximizing your super contributions can significantly boost your retirement savings.

Choose the right super fund. Not all super funds are created equal. Compare funds based on fees, investment options, insurance offerings, and performance. Consider whether you want a balanced, growth, or high-growth investment strategy within your super fund, based on your age and risk tolerance.

• Make voluntary contributions to boost your super balance
• Consider salary sacrifice to reduce your taxable income
• Review and adjust your super investment strategy regularly
• Consolidate multiple super accounts to reduce fees

8. Learn to read financial statements and company reports

"An annual report is the main big document that a company uses to communicate details of its activities, financial results and strategies to shareholders and other stakeholders."

Understand key financial documents. Familiarize yourself with balance sheets, income statements, and cash flow statements. These documents provide crucial information about a company's financial health and performance. Learning to interpret these statements can help you make more informed investment decisions.

Analyze financial ratios. Key ratios like price-to-earnings (P/E), debt-to-equity, and return on equity (ROE) can provide insights into a company's valuation, financial stability, and profitability. Compare these ratios to industry averages and the company's historical performance to gauge its relative strength.

• Read annual reports and quarterly earnings releases
• Pay attention to management's discussion and analysis sections
• Look for trends in revenue, profit margins, and debt levels
• Consider both quantitative data and qualitative factors (e.g., competitive position, industry trends)

9. Develop a personal investment plan aligned with your goals

"Everyone wants to make money out of their investments, of course. We're here to build some wealth! But let's stop and really think for a minute: what is your overall, big-picture goal with investing?"

Define clear financial goals. Start by identifying your short-term, medium-term, and long-term financial objectives. These could include saving for a house deposit, funding your children's education, or building a retirement nest egg. Having specific, measurable goals will help guide your investment decisions.

Create a tailored investment strategy. Based on your goals, risk tolerance, and time horizon, develop a personalized investment plan. This should include your target asset allocation, investment vehicles (e.g., stocks, ETFs, mutual funds), and a regular contribution schedule. Be prepared to adjust your plan as your circumstances change over time.

• Use the SOTM framework: Specific, Optimistic, Time-bound, Measurable
• Consider your current financial situation (earn, spend, own, owe)
• Choose an investment strategy that aligns with your risk profile
• Regularly review and rebalance your portfolio

10. Stay informed about tax implications of investing

"I think tax is really sexy. By the end of this chapter, I hope you agree with me – and feel more comfortable about managing the process for your investments."

Understand capital gains tax. When you sell an investment for a profit, you may be liable for capital gains tax (CGT). In Australia, assets held for more than 12 months are eligible for a 50% CGT discount for individuals. Be aware of how CGT applies to different types of investments and plan accordingly.

Maximize tax-efficient investing. Take advantage of tax-advantaged investment vehicles like superannuation and consider strategies like tax-loss harvesting to optimize your after-tax returns. Keep accurate records of all your investment transactions to simplify tax reporting.

• Keep track of purchase dates and costs for CGT calculations
• Consider the timing of investment sales to manage tax liabilities
• Understand how different types of investment income are taxed (e.g., dividends, interest, capital gains)
• Consult with a tax professional for personalized advice

Last updated: November 20, 2024