Ways to accelerate the saving of your deposit

Show Notes

Kim Northwood is an Investor, Entrepreneur, and the Author of ‘Work Less, Make More: The Millennial Guide to Financial Freedom.’ Kim is passionate about educating people on their personal finances and understanding the risks of financial insecurity.

In this episode, Kim is back to break down one of the more complex ways of saving a deposit: investing. Investing can help you save for a deposit more quickly than the traditional method but there are risks. Kim will break down the range of different investment types you might consider, their pros and cons, and the importance of time frames for investment strategies.

Transcript

Michael 0:00
The information contained in this podcast is general in nature and is not to be taken as financial or personal advice.

Michael 0:06
It does not consider your objectives, financial situation, or needs.

Michael 0:10
You should consider whether this information is suitable for you and your personal circumstances before acting on it.

Michael 0:17
Hi and welcome to The Home Run your guide to buying your first home in Australia.

Michael 0:21
On the show.

Michael 0:22
I’ll walk you through the home buying process from every angle we cover, steps to take the pitfalls to avoid, and the answers to all your questions you’ve been dying to ask.

Michael 0:31
No matter what stage you’re at, you’ll learn everything you need to know about buying your first home.

Michael 0:35
I’m your host, Michael Nasser, and I’m a mortgage broker at Lendstreet, and I really love helping people buy their first home.

Michael 0:45
Kim Northwood is a long-term investor, entrepreneur, and author of Workless Make More The Millennial’s Guide to Financial Freedom.

Michael 0:53
He’s also a return guest on the show, having appeared on a recent episode to explore the different ways of saving for a deposit.

Michael 1:00
In this episode, Kim is going to dive deeper into some of the more complex ways of saving money for your deposit.

Michael 1:06
By exploring the world of investing, he’ll share the different kinds of investments you might wanna consider and unpack the pros and cons of each.

Michael 1:13
Plus.

Michael 1:14
Kim will explain how the timeframe that you want to buy within may help dictate which strategy is best for you.

Michael 1:20
Let’s jump in.

Michael 1:25
Kim.

Michael 1:25
Welcome back to the show.

Kim 1:26
Thank you very much.

Kim 1:27
Thanks for having me again.

Kim 1:29
Fantastic to be here.

Michael 1:30
And since it’s your second appearance on the show I, I wanna start out by asking a fun question before we dive in today’s topic.

Michael 1:36
If you could live anywhere else in the world other than Australia, where would you live and why?

Kim 1:42
It’s a good question, as we were just discussing a little bit before.

Kim 1:46
Yeah, I love skiing.

Kim 1:47
And so there’s a place in the world which combines this like amazing combination of snow and food and just like quality of living.

Kim 1:56
And it’s Japan.

Kim 1:57
I mean, up in the north of Japan Hokkaido area.

Kim 2:01
I just got, like, some of the world’s best skiing, and then you combine that with, like, onsen after skiing, and you’ve got some of the best food in the world.

Kim 2:10
The people are super friendly.

Kim 2:12
I mean, I just think they’ve got it.

Kim 2:13
They’ve just got it made and you know what?

Kim 2:14
And then the snow melts and in summer, all they do is play golf.

Michael 2:18
I’ve never been to Japan, but I’ve got a lot of friends that have been and anyone that has gone has always come back raving about it.

Michael 2:24
Even if they’re a bit unsure to begin with, they’ve come back and they said, Wow, like, But we’re definitely going back.

Michael 2:28
So and the skiing is meant to be phenomenal as well.

Kim2:31
Yeah, yeah, yeah, it it’s awesome.

Kim 2:33
But I tell you what, the secret’s out for Aussies like there’s Australians all over, all over.

Michael 2:37
Yeah, no, no, I’ve heard I’ve heard.

Kim 2:40
People know they aren’t doing a good thing today.

Michael 2:41
We’re gonna be breaking down some of the more complex ideas people might want to explore when they’re saving for a deposit.

Michael 2:47
And we’re gonna focus particularly on investing now before we get started.

Michael 2:51
Investing might be uncharted territory for a lot of our listeners.

Michael 2:54
So what do people need to consider before they get into investing?

Kim 2:58
Yeah, Look, there’s a whole number of things that people need to consider.

Kim 3:02
But I, I guess there’s some really basic principles that people kind of need to get their head around before they jump into the world of investing and committing their own money.

Kim 3:11
And most basic of of these is really the concept of risk and reward.

Kim 3:14
So, you know, it basically just means that, like the higher risk or the higher the chance of losing your money.

Kim 3:20
The generally speaking, the higher the chance of a greater return on your money.

Kim 3:24
And conversely, if there’s a low level of risk, then there’s typically a low level of reward.

Kim 3:30
That kind of makes sense, of course, because if there was, if it was low risk but high return, then everyone would just go into that thing.

Kim 3:35
So it’s a kind of natural mechanism that sort of stratifies people’s investments.

Kim 3:40
But people really, really have to kind of grasp that as a basic concept, and then once you’ve got that, you can start to work out where you want to put your own investments and there is risk to investing.

Kim 3:51
But I think it’s also important to note that there are risks to not investing.

Kim 3:56
So you kind of need to wrap your head around this this concept as well, which is, while there are risks that you can put your money in and it and it might go down.

Kim 4:05
The risks of not investing include things such as inflation risk.

Kim 4:08
So that’s where if you just have cash in the bank, there’s a risk that inflation erodes the buying power of your money.

Kim 4:14
And then there’s a risk asset prices go up higher and more quickly than the rate you can save, so that’s kind of another risk to not investing.

Kim 4:22
The third thing I think people need to really think about before they start investing is their own time frame.

Kim 4:28
When do they need access to this money?

Kim 4:30
Typically speaking, if you need access to the money within, sort of a shorter time frame, the level of risk you can take on is probably gonna be a bit lower because things might go down and you won’t have time to ride out the ups and the downs.

Kim 4:43
Whereas if you’ve got a longer time frame, typically speaking, you can take a little bit more risk and you can be a bit more aggressive with your investing because you’ve got time for things to go up and you’ve got time for things to sort of go back down.

Kim 4:55
And you’re betting that, like over the long term, things will have gone up.

Kim 4:58
But you’re not as worried about those short-term fluctuations.

Kim 5:02
I think they’re kind of really the basic things.

Kim 5:04
And using those concepts, people can then put together their own risk profile and work out their own goals.

Kim 5:11
So how much risk are you willing to take and what actually is your goal?

Kim 5:16
And when do you need this money?

Michael 5:17
So a lot of these strategies, as as you’re highlighting, can depend on how soon you’re planning to buy.

Michael 5:22
So can you explain what would be different for somebody looking to buy soon versus somebody who’s looking to buy in, say, five years?

Kim 5:29
If you’re looking to buy soon, you probably don’t want to be putting your money into really high risk things that may drop within a year and then go back up in five years because it’s no use to you, then you need the money within a year.

Kim 5:41
So if you’re really looking to buy within a short time frame, then your mix of investments is probably gonna be a a bit more cautious than someone who’s looking to buy in, say, 567 years where your mix of investments might be a little bit more aggressive and you can you know you’ve got time to ride out the ups and the downs, so that’s really the key thing.

Kim 6:00
And once you understand that, you can work out kind of which investment products you should be putting your money into.

Michael 6:07
We’re using the term investment obviously pretty broadly here.

Michael 6:10
And what we want to try and do today is go through some options that one might want to consider in terms of making that investment to increase their deposit potentially or their contribution to a purchase of a first home.

Michael 6:21
We’ll start with the least risky and probably the lowest return and build up to the highest risk and highest broad options as you’ve mentioned those combinations.

Michael 6:29
So I guess in your opinion, what would be the lowest and what would be something that’s maybe in the middle of the road and what would be, I guess, the highest risk?

Kim 6:37
Let’s kind of go through it just as a an upfront point.

Kim 6:40
People.

Kim 6:41
I think when they think of investing, some people think only of the stock market.

Kim 6:44
But you actually have to think of it a bit more broadly.

Kim 6:46
There’s several asset classes and they all count as investments.

Kim 6:50
There’s cash that can be an investment of itself.

Kim 6:53
There’s what’s called fixed-interest products, and we can get to those. There’s stocks and shares and things like that.

Kim 7:00
And then there’s property.

Kim 7:01
Of course, there’s an investment and asset class.

Kim 7:03
There’s the asset classes of commodities as well, which, tends to be a little bit more complex.

Kim 7:08
So, you know, I think it’s important just to make that point upfront, that there are several types of asset classes when it comes to investing, and they have their own risk and reward and pros and cons.

Kim 7:17
But to go back to your your question, then if you look at it and you you come in and you say, Look what’s kind of on the lower end of the spectrum when it comes to risk.

Kim 7:26
Well, certainly cash in the bank, right?

Kim 7:28
Like cash is sitting there, it’s in the bank, and you you generally have access to it whenever you need.

Kim 7:34
Now you can still make that an investment.

Kim 7:37
If you look at, for example, high-interest savings accounts, that’s an investment, because it’s gonna return some money to that cash that’s sitting in the bank at the moment.

Kim 7:46
Just having a look online kind of.

Kim 7:47
There are products out there returning around 5.5% on the high-interest savings side, so that’s definitely better than what it’s been in the past, when interest rates were much lower.

Kim 7:58
But of course, it’s still probably on the modest end, considering that the inflation rate in Australia is the latest.

Kim 8:04
That I looked up was 6% to the end of June and act and actually dropping just a little bit.

Kim 8:09
But it’s kind of keeping you up with inflation.

Kim 8:12
At the very least, you know it’s relatively secure and in fact, in Australia, deposits at authorised deposit taking institutions, most banks credit unions, you’d have to look it up to be 100% sure that that particular place is protected, but typically they’re protected up to $250,000.

Michael 8:20
And they’re protected by who that’s it’s a government protection isn’t it.

Kim 8:31
It’s a government protection.

Kim8:32
Exactly.

Kim 8:33
Yeah, it’s actually a hangover from the GFC.

Kim 8:35
So it didn’t place a a protection for people’s deposits so that people didn’t so that there wasn’t a run and everyone didn’t just pull their money out, and it’s ended up sort of staying in place.

Kim 8:44
So it means that deposits in these places are are relatively secure and protected by the government.

Kim 8:50
You can get the money whenever you need it.

Kim 8:52
But on the flip side, you know, with these high interest savings accounts, there’s typically a lot of conditions like you have to put in a certain amount every month.

Kim 8:59
The balance might have to increase every month.

Kim 9:01
You might not be able to withdraw more than you put in.

Kim 9:05
You might have to make a certain number of transactions on the account, and if you do any of these things or if you don’t do any of these things, then you don’t get the interest rate on the account.

Kim 9:13
So it’s, you know, the the people have got to be aware of these conditions on on the cash as well, so it’s certainly an option, but it’s definitely at the kind of the lower end.

Michael 9:20
And those those general rules, I find out that they’re monthly, aren’t they?

Michael 9:23
So, like you’ve got to transfer a certain amount of funds into the account monthly and and then if you don’t do it, then you There’s a lower rate of interest that they’ll pay, as opposed to the you know, the high advertised one that you would see when you’re searching online.

Kim 9:36
Exactly, and what people got under have to understand is that these accounts are they’re designed so that people start banking with these banks.

Kim 9:43
That’s what they want.

Kim 9:44
So there’s a bit of a reward there, but they want you to do your everyday transaction with them and bring you into their kind of ecosystem of products.

Michael 9:52
Yeah, but I can totally see how it is low risk and low reward.

Michael 9:56
And I think you’d mentioned 5.5% there as the benchmark and or as one of the higher returns.

Michael 10:01
And as we go through these different options, perhaps using the percentage of return as a bit of a reference as to the higher the risk, probably the higher the reward in terms of a return as a percentage so then the next one I think a lot of people would think of is probably something like a term deposit.

Michael 10:14
And what are they like?

Michael 10:15
And how do they work?

Kim 10:16
Yep, exactly.

Kim 10:17
So this sits into that kind of second category of asset that I mentioned before.

Kim 10:21
This is fixed interest.

Kim 10:22
So what it means is basically you give across a stack of money to the bank, and in return they give you a fixed rate of interest in terms of payment.

Kim 10:31
So typically with a term deposit, you need a higher amount of money so you can’t just put in, you know, $100.

Kim 10:37
It’s usually in the order of like, 5000 could be a bit more, and what it does is it basically locks up your money for a certain period of time and and then at the end of that, they give you your money back and they give you the interest, and it’s on top of that, so it’s almost like a set and forget investment.

Kim 10:52
You put it aside with the bank, and then they give you a fixed rate of interest.

Kim 10:55
Back on that.

Kim 10:56
There’s a couple of downsides.

Kim 10:58
Of course, probe is, it’s secure and it’s stable, the downside being that you don’t have access to the money during the life of the term deposit.

Kim 11:07
If you need the money, there’s usually like a break fee, and it can be quite expensive and the money you locked away so you can’t use it if you if you need it, you get locked in at a fixed rate of interest.

Kim 11:17
So if interest rates are going up, for example, you’re still kind of locked into that rate.

Kim 11:21
And, of course, when you get the interest, you have to pay tax on the interest because it’s an earning as well.

Kim 11:26
So that’s something else that people have to consider as well.

Michael 11:29
And similarly to a deposit and something I hear a little bit about are bonds and government bonds.

Michael 11:34
Do they fall in the same category as term deposits, or are they something a little bit different?

Michael 11:38
And can you tell us a little bit about bonds and how they actually work?

Kim 11:41
Yeah, yeah, they fall in in in the same category as term deposits.

Kim 11:46
They are a fixed interest product.

Kim 11:48
There are kind of typically two types.

Kim 11:50
There’s the government bonds, which you’ve mentioned.

Kim 11:52
And then there’s corporate bonds, and what they are is basically, just as with the bank, they are a way for the government and corporations to raise money from investors.

Kim 12:02
So they they offer it to the market and people buy it.

Kim 12:06
And then the government or the corporation pays a fixed rate of interest back to the bondholder until the bond matures.

Kim 12:13
So it’s exactly the same as conceptually as a term deposit.

Kim 12:16
Now, when you come into bonds, you’ll see corporate bonds.

Kim 12:20
They’re typically not available to kind of individual investors.

Kim 12:24
Usually they’re big amounts of money, so therefore, the kind of they’re sort of big retail institutional investors.

Kim 12:30
They might be, you know, a $500,000 minimum, for example.

Kim 12:34
So they’re kind of less accessible to individuals,

Michael 12:37
And especially to first home buyers.

Michael 12:38
First-home buyers have no chance to get stuff.

Kim 12:40
So, yeah, if you got $500,000 you’re not worried about the deposit saving.

Kim 12:46
That’s what you’re not worried about.

Kim 12:47
The deposit?

Kim 12:48
Yeah, whereas government bonds, the Treasury bonds, these are bought and sold on the A SX on the stock market, just as you can buy and sell shares, and they offer a fixed rate of interest.

Kim 12:59
They might be paid semi-annually or annually, and in effect, they’re the same as the term deposit.

Kim 13:06
In paying that fixed rate of interest, I guess the slight difference is the price can fluctuate a little bit on the A as people consider the bond more or less desirable.

Kim 13:15
But the flipside of that, of course, is that you can sell whenever you need the money, so it’s kind of you’ve got more liquidity.

Michael 13:22
Well, I’d be right to assume that that a bond might be slightly riskier than a term deposit because with a term deposit, you’ll deposit the funds into the lending institution.

Michael 13:31
And it’ll be that amount that you could potentially pull out at the end of that term deposit and then collect the interest, but with a bond, because it’s a little bit more like a share.

Michael 13:39
If it does drop for whatever reason, and you want to withdraw your funds at that point, it could be less than what you would initially put in.

Kim 13:45
That’s right.

Kim 13:46
Yeah, like so the price can fluctuate for the bond.

Kim 13:49
So in that sense, there is a little bit more risk there in some senses, like they’re probably a little bit more complex to get your head around as to what they do and you know who’s involved.

Kim 13:58
Compared to a term deposit where you can kind of get the full outline, you can go speak to your bank and they’ll tell you exactly what the product is.

Kim 14:06
A term deposit is probably a little bit more accessible for kind of those early-stage investors.

Michael 14:12
So would that also mean that Would the rate of return on your investment be slightly higher?

Michael 14:16
Because that risk is slightly higher as well.

Kim 14:20
Really depends on the bond. I mean, you have to remember, while there is that kind of riskiness with the price, there’s also that benefit that you can sell it at any point in time.

Kim 14:27
And so that’s gonna reduce the kind of overall risk and of the asset people really have to do a comparisons.

Kim 14:34
The best term deposits out there at the moment are probably a little higher than the best government bonds, and that kind of does reflect the way that with the term deposit, you know your money’s locked up for that long period of time.

Kim 14:47
as opposed to the bonds, which can be bought and sold.

Michael 14:49
All right, that’s a good understanding of those entry level, more safe options.

Michael 14:53
Let’s go a little bit more into the intermediate, I guess, options and a little bit more complexity as well.

Michael 14:58
And maybe what when we say investing what people generally feel is shares.

Michael 15:02
And what would you say to our listeners that don’t know anything about shares Or, a you know, maybe considering shares as an option.

Michael 15:09
What are they?

Michael 15:09
How do they work and what are the pros and cons of them?

Kim 15:12
So at its most basic, when you buy a share, you’re basically buying a part of that company, and so you become a part owner of the company.

Kim 15:20
What that means is, if the company does well, you kind of share in that rise in fortune for the company.

Kim 15:27
So if the price of the share goes up, then you participate in that.

Kim 15:31
And if the company is making a profit and is releasing dividends, then you get a share of those dividends.

Kim 15:38
It also means that you get voting rights as a shareholder, and you can do that as a very small shareholder.

Kim 15:44
Now your vote might get outvoted quite significantly, but you’re still a shareholder.

Kim 15:48
You’re entitled to go to the annual general meetings.

Kim 15:50
You’re a part owner of the company, and you can buy and sell on the ASX.

Kim 15:55
They’re the ones that are publicly listed.

Kim 15:57
But of course, like if you start your own company, then you’ll get shares in your own company and that’s gonna be a private company.

Kim 16:03
And it’s not traded on the ASX in the same way.

Kim 16:06
So yeah, look that that’s kind of the shares at their at their mobile. basically.

Michael 16:09
I I, I guess that the pro is obviously, that if you’re able to pick a share that does well, then you will obviously reap some rewards.

Michael 16:17
But and I think what happens more often than not, especially to the untrained, they might not pick the best share.

Michael 16:22
And then I guess the downside of it is that they can.

Michael 16:24
People can potentially lose a lot of money, so I mean, I guess understanding how risky could be and and there is that high risk and reward would you suggest to someone that’s interested in in looking at this as a strategy like what kind of professional do they need to speak to and who would they need to be getting more information about?

Kim 16:40
There’s lots of information out there, and and you can certainly go see a financial advisor and they’ll give you a full, proper rundown.

Kim 16:47
And that’s certainly advisable.

Kim 16:48
If you’re starting to get into these sorts of riskier areas and and in general, actually I would say I mean, financial advice are very good just for your specific circumstances.

Kim 16:57
To understand what you’re trying to achieve.

Kim 16:59
That’s one thing.

Kim 17:00
I, I mean with shares.

Kim 17:02
Other investors do this for a living day in, day out, and they read, you know, financial statements, profit and loss balance sheets, cash flow statements.

Kim 17:10
I mean, they know this stuff back to front.

Kim 17:12
So to get to that sort of level where you’re confidently picking winners, it’s incredibly hard.

Kim 17:19
And that’s why you have fund managers to do it for you.

Michael 17:22
Yeah, and that leads into it.

Michael 17:23
In other words, what managed funds and what they are?

Michael 17:25
Because, I guess does that help mitigate the risk by any way or or How did a managed fund work?

Kim 17:30
There’s a couple of really great things out there now, which can help combine investments into kind of a single investment, single fund.

Kim 17:38
And for people who are kind of wondering how they can get involved in the share market without, you know, having to pick the winners and the losers, they they could have a look at what’s called an exchange-traded fund and to think about it like in the abstract.

Kim 17:52
It’s basically like there’s a fund manager who owns a whole bunch of shares, and then you buy a unit of that and they hold it.

Kim 18:01
The underlying shares kind of on trust for you.

Kim 18:03
So when you buy one unit, you actually get a piece of lots of the pie.

Kim 18:09
You get access to many, many companies.

Kim 18:11
So, for example, there are exchange-traded funds which seek to kind of track the performance of the top 200 companies in in Australia.

Kim 18:19
So if you buy a unit of it, then you kind of get access to the performance of that of those 200 companies, and it does to some extent take out the decision-making of like, do I go with that company or that company?

Kim 18:31
You’re kind of just saying I’m gonna buy the top 200 companies in Australia, for example, or the top 300 whatever the case may be.

Kim 18:39
And then you kind of rise and fall with the share market as a whole.

Michael 18:43
And I imagine that they’re doing a lot of the due diligence when it comes to assessing what shares they’re putting in that portfolio.

Michael 18:49
So that takes a little bit of the responsibility.

Michael 18:51
I mean, to some extent of you having to go through the PLS and all the business statements and documents that would that be a right right assumption there?

Kim 18:59
Yeah, so, like if people get into these exchange traded funds and a and a lot of them are passive, which means that all they’re trying to do is match the performance of the stock market as a whole, they just want to.

Kim 19:13
So they’re not trying to do better than the market.

Kim 19:16
They’re just trying to own assets that track what happens in in the stock.

Michael 19:20
They’re happy with the average, almost like it’s like they’re not looking for an outlier.

Kim 19:23
Yep, they’re just looking for the average.

Kim 19:25
They’re just looking for the average to keep up with things And in that sense, ETFs can be a very accessible way to start investing because you’re kind of saying to yourself, Well, I’m just wanting to track the performance of the stock market as a whole.

Kim 19:38
I’m happy to try and beat things at the moment, maybe down the track, when I kind of understand it a bit more and get a bit more into it.

Kim 19:44
But for the moment, I’ll just kind of track it.

Michael 19:46
OK, what a simple way to put it from what I understand and I and I and I’ve got to admit, I’m I’m very far from an expert in this particular area, so probably like a lot of the listeners trying to work out it in my mind.

Michael 19:56
But it’s like these ETFs or these exchange-traded funds.

Michael 20:00
It’s like just buying a part of the share market as a whole kind of thing.

Michael 20:03
So it’s like I wanna invest in shares.

Michael 20:05
I’m actually gonna go and buy the share market kind of thing, you know?

Michael 20:08
So it’s that type of, as opposed to picking a particular company.

Michael 20:11
I just wanna go and invest in shares, and this is the best all rounder for me to basically, you know, to get into where I am hedging my bets to some extent, because I’m not picking one company that’s gonna go up or down.

Michael 20:21
I’m picking multiple as part of a grouping.

Michael 20:24
And then we’re relying on the average of the performance of these companies.

Michael 20:27
A.

Michael 20:27
And we can split that into different categories.

Michael 20:30
So we’ve got you said the top 200 in the ASX.

Kim 20:33
Yeah.

Kim 20:34
So once you start looking into the types of ETF S that are available, there are a lot of types available.

Kim 20:39
So there are ETF S that track the performance of the top 200 companies on the ASX.

Kim 20:45
There’s some that track the performance of the top 300 companies on the ASX.

Kim 20:50
There’s some that track the overall performance of high dividend companies, so they just want to kind of match dividend return.

Kim 20:59
There’s ETFs that track overseas companies so you can get some that kind of track the performance of the 100 you know, 100 largest companies in the world, for example, or you might think that the US stock market is gonna do well so you can get some that track the biggest companies on the US stock exchange, or European or Asian.

Kim 21:19
So there are kind of a lot of different sort of niche products.

Kim 21:22
There are niche ones now that track the performance of specific set, for example.

Kim 21:27
So if you think a particular sector is gonna do well, then you can start investing in that in an ETF that tracks that sector as a whole, as opposed to kind of just picking one company within that sector.

Kim 21:38
And this has happened to me, by the way like this happened earlier on in my investing career.

Kim 21:43
But you can get caught up in the idea that, like you pick the right industry and therefore that every company in that industry is gonna do well.

Kim 21:49
But it’s absolutely not the case like you can pick a winning industry.

Kim 21:53
But the company you pick might have bad management.

Kim 21:55
They might have debt issues.

Kim 21:56
They might have terrible staff, a whole bunch of reasons why they might do it.

Kim 21:59
Not as well, even if you happen to pick, like, what is a winning industry?

Michael 22:03
Yeah, I mean, I’ve got industries in my head, but I know that same you know, friends and colleagues have have done well in.

Michael 22:08
But I’m not gonna mention them because this is definitely not a podcast where we we’re doing any type of advice or direction or anything like that.

Michael 22:14
With you, it’s just more to explain what these particular different systems of investment may be.

Michael 22:20
But yeah, so that’s ETFS.

Michael 22:21
And I can totally see how they can play a part in somebody, especially somebody who’s probably a first home buyer that’s looking to start into it.

Michael 22:28
And it’s probably not a bad area for them to investigate and get some more information on to see.

Michael 22:32
It seems to be a little bit less risky than trying to pick a winner of a company and hedging your bets a little bit more potentially.

Kim 22:38
Yeah, definitely worth.

Kim 22:39
And And let me just make 11 final point on these ETF there.

Kim 22:42
You get to participate in the price rise as a whole if it goes up the AX.

Kim Kim 22:48
But you also get access to dividends from all of those companies as well.

Kim 22:51
So if you’re investing in the top 200 companies every time, all of them pay out a dividend.

Kim 22:56
You also get a share of that and that, for the Australian context, is really quite good, because often those dividends are what they call Frank, which basically means the company’s paid a bit of tax on it already and then, therefore, that flows through to you as well.

Kim 23:12
So there’s kind of these tax advantages to frank dividends as well.

Michael 23:15
OK, so that’s a a concept there that we’d probably need to explore, as well the frank of dividends and how that works.

Michael 23:21
But it’s just a, I guess, a a bit of a tax benefit, potentially that one would want to explore.

Michael 23:25
So getting into maybe some slightly higher risk, high reward territory, and I did mention it before, but I might have been a little bit incorrect in the way II I mentioned it.

Michael 23:32
Managed funds.

Michael 23:33
Now these are different ETFs.

Michael 23:35
Is that correct?

Kim 23:37
They are the overall idea is the same.

Kim 23:40
It’s still a fund.

Kim 23:41
It’s and pooled investment.

Kim 23:43
So lots of people put their money together into a single fund that invests in lots of things.

Kim 23:47
Underlying investment, the sort of the main differences with an ETF that often they’re actively managed.

Kim 23:55
So therefore, manage funds, which means that the fees are gonna be typically a little bit higher.

Kim 24:00
And what that means is, you know, they they’re basically trying to beat the market.

Kim 24:03
If they’re actively managed, they’re saying, pays a little bit extra in fees, and in return, we’re gonna try and do better for you.

Kim 24:10
So that’s kind of where you get that risk-reward ratio coming back.

Kim 24:14
And then, you know, the other major difference is that the managed funds usually are not traded on the ASX.

Kim 24:21
So you don’t buy and sell on the ASX.

Kim 24:24
You kind of invest directly with the fund manager, who then all the money together and invest in things on your behalf.

Kim 24:30
And by the way, I should say almost all of us have a managed fund already working for us, and that’s it’s our super fund.

Kim 24:38
So it’s compulsory.

Kim 24:40
You’ve got money coming out of your pay all the time to go into these funds, and they’re taking your money and investing on your behalf in property and bonds and stocks and commodities and infrastructure, et cetera.

Kim 24:50
And it’s all done on on on your behalf.

Kim 24:52
So most of us are actually already have a managed fund working for us.

Michael 24:56
We’re all already investors without realising I’ll pick up on that point because that’s I think that’s great.

Michael 25:01
And and people that are listening to this and are becoming aware of it or something’s just registered now.

Michael 25:06
Because of that, I would probably challenge you guys to find out who your super fund is and start to become inquisitive as to how they’re investing your money.

Michael 25:14
Because I I know and I learned this myself is and and I’m part of an industry super fund.

Michael 25:18
You can actually log in, and you can actually see how they’re investing your money and you can actually have a have a bit of a say so.

Michael 25:23
And it’s not necessarily very fine in terms of or or you know you can’t get very micro in terms of what they’re investing in.

Michael 25:29
But I think there are broader categories that you can select to have your your money allocated into or your super fund money allocated into and and they’ve got information about that through their websites, and you can see what the average returns have been in certain categories.

Michael 25:41
And if there’s one that’s more less risky than another you might say, Well, I want you to invest 100% of my funds into this type of, share class or it might be another type of class.

Michael 25:50
So would you also recommend that or any thoughts on that?

Kim 25:52
No, I couldn’t agree more.

Kim 25:53
I couldn’t agree more.

Kim 25:54
I think it’s almost insane in some ways how, like we have all this money being taken out of our pay every fortnight monthly, whatever the case may be and it’s invested on our behalf and a lot of people don’t know what’s happening to it.

Kim26:07
I mean, it’s your money, you know?

Kim 26:09
It’s our money and I.

Michael 26:10
I guess it’s probably an age related thing, like I mean, depending on on on the age of the individual.

Michael 26:14
I mean, for first home buyers, it’s probably not something they’re thinking about this super but and I know I was around sort of 2009 and 10 and and and and working at that time.

Michael 26:20
But there are a lot of people that went on to tops who had the the global financial crisis.

Michael 26:24
But anyone that was about to retire at that stage when the share market basically just bottomed out.

Michael 26:29
A lot of their wealth that they had generated over the last 10 or 15 years had basically wiped out.

Michael 26:34
So they were in a situation where they probably couldn’t retire because they went.

Michael 26:37
Now that’s obviously something you probably can’t forecast.

Michael 26:40
But it’s definitely part of that investment risk.

Michael 26:43
I guess that we’re all already and maybe unknowingly subject to.

Kim 26:47
No, that’s exactly right. We’re all we’re all subjected to war.

Michael 26:49
Yeah, I think the super I don’t know what how much I don’t know how many trillions it’s worth now, but I’m not sure if it’s more than property Australian property or if it’s second behind Australian property in terms of value of the, Australian property market against the size of our, you know, superannuation market within Australia.

Kim 27:03
But I know it’s the I think property overall is still more valuable in the supermarket. I think I would have to.

Michael 27:09
Yeah, it’s questionable, right?

Michael 27:12
Like I mean, you can’t definitively say one or the other without researching it, so so I and I and I remember hearing it recently where it’s there or thereabouts and I still think real estate is number one, but in any case, and that leads us into another option that I want to talk about, which is relevant for anyone looking to get onto the property market, which are real estate investment funds.

Michael 27:29
They’re cropping up more and more now.

Michael 27:31
I feel, what is a real estate investment fund and how do they work and what are the pros and cons of them?

Kim 27:36
It’s basically just like a fund, So it’s pooling money together to buy assets on your behalf.

Kim 27:43
But in the case of real estate investment, trust, they they’re just gonna buy property.

Kim 27:47
So property assets and it invests in residential real estate.

Kim 27:52
But they might also invest in commercial real estate.

Kim 27:54
So, you know, these are the types of funds that invest in hospitals and shopping centres and warehouses and corner stores and things like that.

Kim 28:04
So what it does is it allows you kind of to get access to the Australian property market without having to own and manage an entire property.

Kim 28:13
So when you invest in one of these, you’re basically getting kind of a piece of what’s happening in the property market as a whole.

Kim 28:19
Now I mean, there’s a couple of things to note there, I mean, but when people think of property market, they often think of residential property, and they often actually think of Sydney and what’s happening with the crazy Sydney property market.

Kim 28:30
But the fact is, like property across Australia as a whole is often, and it often doesn’t have that same insane kind of rise in prices, and it can be quite stable.

Kim 28:41
In fact, it can even go down.

Kim 28:42
Just look at, for example, Now you know commercial properties.

Kim 28:45
Office rental space in the city is is less less in demand because more people are working from home.

Kim 28:51
So the returns for the property owner, the manager, the commercial property might be a little bit less so.

Kim 28:56
Real estate investment trusts.

Kim 28:58
You know, you get access to property in Australia, but you might not get that kind of crazy sort of price rises that you see Sydney.

Kim 29:04
But still, it’s a really good way.

Kim 29:06
If people want to get into the property market without actually owning and managing an entire property, then there’s certainly a way to do that and particularly if people think that certain commercial properties are gonna do well as well.

Kim 29:18
It’s a far more accessible way for individual investors to get to get involved.

Michael 29:22
Yeah, no, no, I can imagine.

Michael 29:23
And I would assume, because it’s it’s the real estate.

Michael 29:25
It’s the Australian property, you know, real estate sector that you’re investing in.

Michael 29:28
It’s probably there’s a bit of stability there compared to say, you know, investing in shares in a company or something like that.

Michael 29:33
So there is that element of, you know, of stability there again, that’s that back to that risk-reward, scenario, though, but it’s very stable than than the risk of of a big reward, or or the the amount of the reward might be not as high as some other investments categories that we’ve spoken about.

Kim 29:49
Yeah, and then, I mean a couple other points with the REITs.

Kim 29:51
Its is, just as we have a share or company, you get dividend returns, they pay out with the property.

Kim 29:57
You get some rental returns whenever, whenever that money comes in.

Kim 30:00
So you kind of get access to that as well.

Kim 30:03
And these REITs, they’re bought and sold on the ASX just you know, you can buy them just like you can buy ETFs and shares, so they’re bought and sold the same way.

Kim30:13
So of course you can get that fluctuation in the price of the unit as well.

Kim 30:17
Then there are.

Kim 30:19
I mean, if people wanna get into this space a bit more, there’s, those are the listed funds.

Kim 30:24
So they’re listed on the ASX.

Kim 30:26
And there’s unlisted funds, which again kind of the idea that a fund manager will take money from a lot of people and pour it and buy real estate property across the country.

Kim 30:36
And there’s, you know, there’s a lot of good research out there.

Kim 30:39
Core property research does some pretty good research on property funds if people are looking to get into it a little bit further.

Michael 30:47
But definitely something that it’s worth exploring if people are looking at at ways of boosting their their deposit by some savvy and diligent investing, well, thank you for explaining all of those different categories and and from what you’ve mentioned and a bit of a summary, the bonds that we’d mentioned the shares, the ETFS, and that these real estate investment funds the options, they’re accessible via the ASX.

Michael 31:09
If people wanted to look into that and as well as then, obviously the managed private companies that are looking after that as well.

Kim 31:15
Yeah, yeah.

Kim 31:16
So shares on the ASX you can buy shares particular companies.

Kim 31:19
You can buy ETFs.

Kim 31:20
You’ll be able to buy government bonds in the ER.

Kim 31:23
Yes, they they are available to buy and sell on the ASX.

Michael 31:26
Yep, all right.

Michael 31:27
And this is the information for people just to digest.

Michael 31:29
And if they’re interested in pursuing anything further, obviously you need to speak to the relevant professional.

Michael 31:33
And I’d probably say to be a financial advisor of some type that can guide you through and explain you through the best way to perhaps structure this and plan this out.

Michael 31:41
Final two questions to finish up.

Michael 31:43
If it’s OK, the first one is, in your opinion, what should first home buyers prioritise in the process of saving their deposit?

Kim31:50
I think it’s about keeping up with price rises.

Kim 31:53
So in the past it was you could just put money aside diligently and save and build up that money for a deposit.

Kim 32:01
And I think the market has changed a bit now, and house prices keep on going up.

Kim 32:05
So I think it’s important to look at strategies to keep up beyond just saving.

Kim 32:10
That might be, you know, high-interest savings accounts.

Kim 32:13
It could be bonds, deposits.

Kim 32:15
It could be ETFs.

Kim 32:16
It could be shares.

Kim 32:17
It could be IERTs.

Kim 32:18
But I think it’s important that people look at these options and understand them because the rate at which you can save may not be enough to keep up with the price rises and what you need to get deposit.

Michael 32:29
Yeah, and I think to top off on that, I mean, yeah, we traditionally, we always think just save, save, save, put X amount of your money away and just save, save, save to get the house.

Michael 32:37
But it was always a challenge to do that.

Michael 32:39
But now, with the other economic factors that are are affecting us today with cost of living and things, it’s hard to play that you can’t just rely on saving.

Michael 32:46
If you’re looking to build up your deposit, you have to look at these probably there more, which is why we’re talking about it.

Michael 32:50
There’s more complicated methods of investment so that you can save a little bit quicker or at the same rate as everything else going up as as you mentioned a few times, The second one is what’s one thing you wish you knew before you started investing.

Michael 33:04
So if you go back to when you started knowing what you know now, you know what would that be?

Michael 33:08
And what would you act on then?

Michael 33:09
Knowing what you know now.

Kim 33:13
It’s basically just what I’ve said. Like when I was younger and starting out before I’d started sort of my investing journey.

Kim 33:18
I was, you know, quite diligent with savings, putting money aside, making sure that I kept more than I spent.

Kim 33:25
But what I didn’t understand was the difference between saving and investing.

Kim 33:29
And that’s what I wish I’d learned kind of earlier.

Kim 33:31
Savings is putting money aside, but investing is putting that money to work for you.

Kim 33:36
So there’s a difference there and quite a critical difference.

Kim 33:39
And I think if I’d known that earlier, then I certainly would have been investing earlier.

Michael 33: 45
And hopefully this podcast for somebody listening.

Michael 33:47
They can recognise that particular thought.

Michael 33:49
And now, with the content throughout this particular podcast as well, they can start to understand.

Michael 33:54
What are these investments?

Michael 33:55
What do they look like?

Michael 33:56
and hopefully it just sort of lights the fire that might get them to explore these options and assist them in that journey.

Michael 34:02
Thank you so much, Kim, for joining us Day on the show.

Michael34:04
Where can our list to find you if they want to learn more?

Kim 34:06
My website.

Kim 34:07
Kimnorthwood.com And that’s where they can buy a copy of my book, work less, make more The Millennial’s Guide to Financial Freedom and then, secondly, just developing at the moment a new course on investing with founder of Ladies Finance Club Molly Benjamin.

Kim 34:24
And that course will be available shortly so people can sign up and preregister for the course.

Kim 34:32
So we’ll start with a kind of entry level beginners guide to investing.

Kim 34:36
And then and then it kind of gets progressively more more complex.

Kim 34:39
So, yeah, just open for preregistration’s at the moment.

Kim 34:42
If people go onto my my website kimnorthwood.com, there’ll be a tab investing course, and they can, can follow that to sign up.

Michael 34:49
That’s super exciting.

Michael 34:50
Awesome.

Michael 34:50
Well, thank you for sharing that, and yeah, like I said, that’ll be in the show notes for sure.

Michael 34:53
So anyone that wants to check that out.

Michael 34:54
Look in the show notes and the links will be there for that.

Michael 34:56
Thank you so much again for joining me on the show.

Michael 34:58
Kim, It’s been great and fantastic topic today.

Michael 35:00
Really insightful.

Michael 35:01
Really appreciate it.

Kim 35:02
Yeah.

Kim 35:02
Great.

Kim 35:02
No, thank you again for having me.

Kim 35:04
It’s, enjoyable.

Kim 35:05
As always.

Michael 35:08
You’ve been listening to the home run your guide for buying your first home in Australia.

Michael 35:12
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Michael 35:14
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Michael 35:20
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Michael 35:27
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Michael 35:31
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Michael 35:36
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Michael 35:40
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Michael 35:43
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Michael 35:46
I’m Michael Nasser and we’ll be back next episode covering another step on the journey to owning your first home.