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How Much Money Do You Need to Start Investing?

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Key takeaways

  • There’s no ‘right’ amount to start investing – it all depends on your personal financial situation and your investment goals. Start by paying off debt first, making a budget and setting up your emergency fund.
  • $500 is usually the minimum amount for an ASX-listed investment, but there are also other options such investing apps that allow you to invest with as little as $5.
  • There are fees and costs associated with investing in ASX shares. You should expect to pay a fee (known as ‘brokerage’) when buying or selling shares, which is normally either a flat rate or a percentage of the trade’s value.
  • Most investors will also have to pay capital gains tax and income tax (on dividends) in the course of investing in ASX shares. However, don’t let any of that put you off. Investing in anything usually incurs tax, and shares are no different!

How much do you need to start investing?

Investing is an exciting but daunting concept. Putting your savings to work earning more money for you sounds great, but most people don't have a spare thousand dollars just lying around. So, can you still invest in shares with a more modest sum?

Good news! You don't need a lot of money to start investing. While the standard minimum amount to start buying shares on the ASX yourself is $500, there are also other options such as managed funds or investing apps that allow you to invest with as little as $5.

Here's what you need to know about how to transform even a small amount of money into the beginnings of an investment empire.

What is the right amount to invest?

The short answer is that it depends on your personal financial situation and your investment goals.

If you've got a lot of money sitting in a chequing account and you're interested in saving for retirement 30 years down the road, your "right amount" is going to be very different from that of someone who's maxed out their credit cards and is hoping to put a down payment on a home in five years. So while you can invest any amount – big or small – what you should invest is up to you.

Here are some general guidelines on how to choose the right initial investment amount:

  • Pay off debt first: Sure, it may be tempting to start making money right away, but investing is a long-term activity. Your investments will probably start generating money slowly, but gradually earn more and more thanks to the magic of compound interest, dividends, and growth. That means that, at least at first, high-interest debt like credit card debt is likely to cost you more money than you make through investing. So pay down any debt with more than an 8%–10% interest rate before investing your money.
  • Make a budget: Extra money you put into your superannuation account – which you usually can’t withdraw before retirement – doesn't do you any good if you can't make rent. To be sure you're able to set aside money for investing, write out a monthly budget that outlines your mandatory expenses (like utilities, mortgage payments, and groceries) and discretionary spending (like entertainment and eating out). That should help you determine what you can afford to put toward investing.
  • Don't forget about emergencies: We've all had that unexpected expense – a car repair, medical emergency, or layoff – that blows our budget out the window. While putting money into super can offer tax advantages, it also makes those funds much harder to access in a hurry. Make sure you have means to pay for an emergency by setting aside money in an ‘emergency fund’ savings account – the last thing you want to have to do is sell your shares if you find yourself in a tight spot.

Once you've done those basic calculations and set upon some financial goals, you should be able to find an amount you can commit to investing every month. 

Yes, every month.

Putting in a lump sum once and forgetting about it will still pay off in the long run, but putting in a little bit more every month will help you reach your financial goals sooner. 

So, maybe that amount is $2,000 a month. Maybe it's just $10 a month. The overall amount doesn't really matter, as long as it's right for you. 

Is there a minimum amount to start buying ASX shares?

To execute a buy or a sell trade on the ASX, most brokers require a minimum order value of $500 for a buy or a sell order. Some brokers are more lenient than others in this area, but as a general rule, $500 is usually the minimum investment amount for an ASX-listed investment.

Saying that, many unlisted investment vehicles such as managed funds or investing apps have different rules, and will accept far lower investments. If $500 is too much for your own investing needs, this might be an area worth exploring. 

How can I invest a small amount?

To invest any amount of money in individual shares, index funds, or other types of investments, you'll need to open an account with a broker.

Most of our banks (including the big four) have brokerage offerings, and if you have an account at a bank, it may offer some perks for investing with it. However, you may also want to consider an independent brokerage firm or an online-only or app-based broker. 

Bear in mind that investing small amounts at a time can eat away at your returns through brokerage fees. If you’re buying $500 worth of shares every month and your broker charges you $15 a trade, you’ll end up paying $180 a year in order to invest $6,000, or 3% of your total capital. That means your shares will have to appreciate 3% just so you can break even. 

If you only have small lump sums to invest, it might be worth waiting until you have parcels of $1,000 or more before you buy your shares.

If you're starting with a small sum, make sure the broker you're considering offers the following:

  • No minimum balance fees: Investments can go up, but they can also go down. Even if your initial investment amount is higher than the broker's threshold for a "low balance" fee, if you invest in a stock that drops, you might wind up beneath that threshold down the line. 
  • Low brokerage fees: Our ASX brokerage fees are still much higher than the United States (where free brokerage is common), even though these fees have come down in recent years. However, there is still disparity between what the major brokers charge for buy and sell orders, especially when it comes to international shares. So do your research to make sure you don’t pick a broker with the highest fees on offer.

Do I have to pay a fee to buy shares?

As we’ve flagged earlier, investing isn’t free. Like buying any asset (a house for example), there are fees and costs associated with investing in ASX shares. While stamp duty on shares was (thankfully) abolished decades ago in all Australian states and territories, you should still expect to pay brokerage on all share transactions you make (buy or sell). 

Brokerage is a fee you pay your broker to execute a share purchase or sale. It is normally charged on each transaction, and is often scaled based on the value of the transaction (such as $10 for trades under $1,000 and $20 between $1,000 and $5,000). 

Brokerage is normally either a flat rate (i.e. $20 a trade) or a percentage of the trade’s value (i.e. 0.2%). Many brokers charge a higher brokerage fee or a foreign currency fee (or both) for trading of international shares, such as the US-listed Apple (NASDAQ: AAPL). If you’re considering doing a lot of international investing, this is an area to pay attention to.

You might have heard that US investors aren’t charged brokerage at all these days – a model famously pioneered by the US broker Robinhood. However, this business model usually works by selling your order flow instead (telling other brokers what you’re buying or selling before you do) – meaning you’re effectively taking a haircut when your order is executed anyway. Remember, there’s no free lunch here.

Brokerage is annoying, but it’s one of those things we investors just have to accept as part of the deal. However, you can normally take brokerage off of your cost base for investing, which leads us into our next segment...

What you need to know about taxes and investing

Do you need to pay tax on your investments? Unfortunately, yes.

As we said earlier, there is no free lunch, and this extends to taxes when it comes to investing (tax is one of the two unfortunate certainties of life, after all).

There are two types of taxes most people will normally have to pay in the course of investing in ASX shares: 

  • income tax (taxes on your dividends)
  • capital gains tax (taxes on your profits)

Taxes on dividends

Normally, income tax is only directly payable on any dividends you receive from your ASX shares. These dividends are attached to any other income you make (such as your salary or wages) when you fill out your tax return. 

If you receive $1,000 in dividends over a year from your ASX share portfolio, those dividends will have to be added to any other money you’ve made that year (such as wages from your job) and included in your tax return, and you will pay income tax on that $1,000.

However, if your dividend comes with franking credits, you can use those franking credits to reduce your taxable income (or receive a cash refund if you don’t pay tax). 

Franking credits are generated when a company pays tax in Australia. If you then had to pay tax on dividends coming out of that company, you would effectively be taxed twice. Franking credits exist so this ‘double taxation’ doesn’t occur, and is one of the best perks you can get from investing in shares.

If a company pays no dividends, you normally don’t have to pay income tax. 

Taxes on profits

Let’s now turn to the other kind of tax you might pay on ASX shares: capital gains tax (CGT). CGT is only payable if you sell your ASX shares. If you haven’t sold any of these shares to date, then you won’t have a tax bill, even if the shares have gone up by 1,000%. Simple. 

However, if you do decide to sell some of your shares, you will have to pay CGT on the profit you’ve made (not the whole invested amount). That amount is simply added to your income tax bill at the end of the year. 

So, say you bought $1,000 of Company A shares at $10 each, and you sell them 6 months later for $20 (bagging you $2,000), you would be adding a capital gain of $1,000 to your taxable income in your tax return. Any costs you incur from investing, such as brokerage, can be deducted from your taxable capital gain. So if you paid $20 in brokerage for both the buy and sell moves above, your capital gain would be $960.

Further, if you sell shares for a loss, you can normally roll over that loss to deduct against any future gains. So, if in a previous year to the trade above, you bought $1,000 worth of Company B shares at $20 a share and sold them for $10 a share, you would incur a capital loss of $500. You could then use to offset the Company A capital gain, which would now be $460.

One more perk (under current tax laws), if you own a share or investment for longer than 12 months, you may get a 50% discount on those gains for CGT tax purposes. So if you held Company A shares for a year and a day, and sold them at the $20 price, your taxable capital gain would be $480 rather than $960.

Foolish takeaway

Investing isn’t free, or tax-free for that matter. If you invest in ASX shares, you can expect to incur charges for buying and selling shares, as well as a tax bill if your investing is successful. 

However, don’t let any of that put you off. Investing in anything (property, businesses) usually incurs tax, and shares are no different. 

Even though the more money you make, the more tax you’ll probably have to pay, you’ll still get to keep the lion’s share of your profits. So, with brokerage and taxes, always aim to keep them as low as (legally) possible, but never let them get in the way of a good investment.

Article last updated: 17 November 2020. Sebastian Bowen contributed to this report and has no position in any of the shares mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Apple. The Motley Fool Australia has recommended Apple. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.