Pardon us for interrupting your illustrious investing career for this very important public service announcement: Any money you need in the next month, five months, or five years does not belong in the share market.*
Go ahead and read that sentence again. It is the key to avoiding heartache, headache, and a lifetime of Quick-Eze addiction.
Got it? If so, please continue reading. For those into footnotes, we’ve provided this one:
*The last place for your short-term savings is any place where it is at risk of being worth less when you need it most. That rules out the share market, which is prone to roller-coaster-like ups and downs, as is evident on any chart that tracks its month-to-month performance. Now, we don’t want to scare you away from shares. Over most five- and 10-year periods, the squiggly line on the chart that resembles a ride on the Great Share Market Scream Machine morphs into a gently rising upward slope. The key is time — giving your money time to ride through the stock market’s bumps and tumbles and reap the rewards of long-term investing.
With that important bit of business out of the way, we’re ready to find proper accommodations for all of your savings needs and devise a strategy for funding your long-term financial goals.
The best places for your short- and mid-term savings
There’s a vast array of appropriate places to stash the money you may need to access soon, including basic bank accounts, high-interest savings accounts, term deposits, cash management trusts and even Government bonds.
These types of accounts are safe harbours: They won’t provide killer rates of return (and may not even keep up with inflation), but they do provide a virtual guarantee that the money you deposit will all be there when you need it.
Keep in mind that one type of account may not best serve all of your short-term savings needs. For example, cash earmarked for a deposit on a house you plan to make in a few years is ideal for a term deposit. The kid’s summer camp is better off in an instant access high-interest savings account.
Once you’ve deployed your funds for near-term needs, it’s time to find the right spot for the money you’ll need to cover Saturday date nights … in the year 2041.
Much of your long-term cash stash (specifically, money designated for your retirement years) will likely belong in an account set up solely for that purpose — we’re talking Superannuation.
For reasons far too complex to go into here, we can’t get into any detail about Super, so instead we’ll point you to the excellent Australian Tax Office site and its section on Super Funds. If you are an employee, you’ll likely have a Super fund – we urge you to get to know it as if you were married to it.
For all the benefits of Superannuation, we’d suggest you’ll also want to build a large nest-egg outside your retirement fund. You know, for all the extravaganzas in your later life, like a round-the-world cruise, a new car or the latest and greatest zimmer frame (only joking!).
Get Yourself A Broker Account
If you want to buy shares, you’re going to need a broker. And in this modern day and age of the internet, why not choose an online share broker account?
You can buy and sell shares with the click of a button – no more phone calls, no talking to bespeckled gentlemen wearing bowler hats and braces, and commissions far cheaper than the offline variety.
Most of the big banks offer execution-only brokerage accounts. Commissions start from around $15 per trade for trades up to $10,000.
The sooner you get your short- and long-term savings accounts set up, the sooner you can get to the fun stuff — investing.
Which brings us nicely onto our next step…