Savings can be hard to accumulate and sometimes even harder to maintain. It can be tough to build a backstop of cash savings to start investing with. Here we look at how you can start building your portfolio without savings.
Saving money can be synonymous with sacrifice. For this reason, it's all too easy to coast by without significant (or any) savings. Always something to be addressed tomorrow, or when you're earning more money, or have more time, or just can be bothered.
Record low interest rates mean the temptation to put money in the bank is severely curtailed, making it even harder to save. And it seems like saving is a prerequisite to investing. After all, don't you need money to invest? So what do you do when you're ready to start investing but have no savings?
Start small
The problem with making sudden, big, changes is that they rarely stick. Take things slowly to begin with to give yourself the best chance of developing new habits. Start by putting a small amount aside each day to fund your future investments.
Think of this as another daily purchase. You could put away a small amount of physical money each day, or transfer a small amount to a separate account. The amount could be as little as a few dollars, and should be something you can afford.
Over time you may want to think about increasing the amount you put towards 'purchasing' investments. This could require you to set or update your budget or swap out other items that you currently purchase.
Some sacrifice may be involved, but remember to take it slowly and one step at a time. Try to let each change settle for a month before attempting the next. Long-term, consistent change is more effective than short-term, sporadic change.
Open an account
Open a simple online brokerage account that allows for small value minimum trades. You'll need this account in order to buy and sell shares and exchange traded funds. Take care with fees as these will erode the value of your investment.
Learn to navigate the interface of your chosen online broker and become familiar with the features offered. Alert services offered by online brokers can be extremely useful in keeping up to date on any companies you are monitoring.
Make sure you understand how to execute a trade and check the interest rate on the linked bank account.
Consider your options
Think about what you are trying to achieve by investing – what are your time horizons? How risk averse are you? Are dividends important to you or do you prefer the prospect of capital growth? Do you wish to diversify? How far and how rapidly? The answers to these questions will help inform your investing decisions.
Parcels of shares worth $500 can generally be traded. Certain investing apps, however, allow users to trade securities in parcels as small as $50. Many early stage investors prefer to build their portfolios around stable, diversified securities, at least initially. ETFs and larger listed companies tend to be attractive for this reason.
Make your shortlist
Once you have surveyed the investment landscape, you can prepare a shortlist of potential investment options. ETFs providing broad ASX coverage include Betashares A200 (ASX: A200) and iShares Core S&P/ASX 200 (ASX: IOZ).
Popular ASX shares for early investors include consumer staples such as Woolworths Group Ltd (ASX: WOW) and Coles Group Ltd (ASX: COL). The big banks have long been favourites of retail investors, although have been mired in controversy for the best part of 2 years.
National Australia Bank Ltd (ASX: NAB), Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corp (ASX: WBC) were known for their dividend yields until increased regulatory and remediation costs saw 2 of the 4 cut dividends this year.
WAAAX shares have also been in favour with investors this year. WiseTech Global Ltd (ASX: WTC), Appen Ltd (ASX: APX), Altium Limited (ASX: ALU), Afterpay Touch Group Limited (ASX: APT) and Xero Limited (ASX: XRO) have seen share prices rise to dizzying heights before undergoing abrupt corrections.
Execute your trades
Once you have decided which investments are right for you, you can put in your order(s) through your online broker. You do not have to rush this step – after all, you have taken your time until now.
Orders can be entered as market or limit orders. A market order will be transacted at the current market price. With a limit order, a maximum price is set (for a buy order) or a minimum price is set (for a sell order).
Settlement generally occurs 3 days after the trade is executed, so ensure you have funds in your linked account. Interest rates on accounts linked to trading accounts are generally low, so you may not want to keep funds in them for long periods.
Organise your returns
If your investments pay dividends you will need to choose whether to have the dividends paid to you or participate in any available dividend reinvestment plan (DRP). If you want to build the value of your investments as quickly as possible, consider reinvesting dividends.
Even if your investments do not offer a dividend reinvestment option, you can reinvest dividends by dedicating the funds towards future investments. Rather than spending the income on everyday expenses, set it aside along with your daily investment contribution. When you have a sufficient amount, make your next investment.
Foolish takeaway
Starting your investment portfolio with zero savings might not be the easiest thing to do, but it is doable. By subtly altering your habits in the direction you want to go in you can start to accumulate investments which will grow over time.
