The great news is that it's WAY easier than buying a house. There are many ways of doing it but I'm going to describe what at the time of writing is the simplest and lowest cost in my mind.
Step 1. Sign up to a Broker: Create a STAKE account
Stake is an Australian based broker (platform for buying/selling shares) that is both low-cost (only $3 per purchase! I've been used to paying $20 with Commsec...) and IMPORTANTLY FOR ME gives you a dedicated HIN. The other low-cost brokers at the time of writing had a pooled holding whereby technically you did not have the shares in your name. This is extremely unlikely to be a problem, but then again why take the risk for no reason? I also like the Stake platform because it is so easy to use and clear. It isn't overwhelmed by graphs or colours trying to suck you in to "playing" the share market. Signing up is very easy, just go to their website and follow the guide.
Step 2. Get your Stake account details and transfer money to it
Once your account is setup login to it, make sure you are in the Australian ASX section (you will see the Australian flag in the top right corner, if it's the USA flag just click it and select Australia). Click the "money" icon that is in the top right corner of the screen, next to the magnifying glass, and select "deposit". This will bring up the details of the Account Name, BSB and Account Number for you to transfer money to. Record these in a safe place as you'll be using them every time you want to buy shares.
IMPORTANT STEP - check the price of the share you intend to purchase, as the first time you buy it you need to purchase at least $500 worth of it. Given that some shares cost hundreds and even thousands of dollars per share you may need to purchase much more than $500 worth. For example, at the time of writing VAS (the Vanguard Australian Shares index) was around $95 per share. Therefore you would want to transfer enough money to buy more than $500 worth of it at this level plus a buffer plus the $3 fee. One issue with Stake is that withdrawing the money from your account is not easy or quick, so you want to deposit as close to the amount you need as possible. Therefore I'd recommend depositing the amount that it closed at the previous day plus around 2%. This will cover any unexpected major rises in price without leaving too much leftover money sitting in the account doing nothing.
Step 3. Buy your shares in the middle of the day once things have "settled"
The start and end of the trading day is often quite variable and all over the place. I typically buy my shares at some stage in the middle of the day. All I do is a) login, b) make sure that the Australian flag is there and that my money has been deposited into the account, c) click the magnifying glass and type in the name of the share I want to purchase, d) make sure that the "BUY" option is chosen and select "Market Order" as the order type, then e) type in the number of shares I want to purchase making sure that the "Max amount including fees" is less than the value I have available. If that's all good click the "Review Buy" button then purchase the shares. That's it. Done. This should be quick and easy, but you will be VERY nervous your first time.
Step 4. Update your records
You will then get sent a PDF of the order details via email. Save this to a safe place. Have a simple Excel sheet with the purchases you have made in it, with the dates, share and price per share recorded. This is important come tax time, which is actually much easier than you'd think. Once you provide the Tax Office with your HIN it automatically fills in your tax info for you.
Step 5. Ignore all finance media and do not login to Stake again until next time you are ready to buy.
If you have bought a diversified index fund you are now the proud owner of a tiny piece of hundreds or thousands of some of the most successful companies in the world. You do not need to worry about their success, that is the job of the CEO, CFO, line managers etc. etc. that you are employing at each of these companies. If one of these companies goes bust that is fine, your index fund will replace it with another one. The current "value" of the index of these companies is completely irrelevant unless you need to sell it that day, but why would you? So don't read about it, check on it, or think about it. The only time you check on the prices is next time you are ready to purchase more shares. This is not the only way to do it, but it is the way to do it. The more you tinker the less successful you will be.
Other method of ordering I don't like: To buy shares you can also sit at your computer all day typing in "limits" on prices and waste hours or even days if they are not getting picked up (i.e. you offer less than people are willing to sell at and therefore you don't do a "deal"). Don't fall into this trap. You might save a few bucks some times but you will more likely lose money over time as the odds are the longer you muck around the more likely prices will go up. For shares liked the index funds I use the difference between the buy and sell offers are typically very small and not worth trying to arbitrage.
I love the figure on page 1 and the table on page 2. This sums up everything you need to know about shares. You have the classic "normalish" distribution of the histogram in Figure 1, which shows the most common annual return is between +10% and +20%, with almost all returns between -30% and +50%. However, there are some outliers there both negative (between -50% and -40% in 2008: ouch!) and positive (between +60% and +70% in 1983 and 1975: woohoo!). Then the table shows how the returns are all over the place, with no apparent rhyme or reason. If you think the period after the big hit of 2008 from 2009 to 2019 was great for investing have a look at 1975 to 1980, or 1931 to 1934! This shows how if you hold on after a large drop the odds are you will rocket back out of it.
These 2 pages are pretty much all the info you need. If you are stressed out during a decline and think you need to sell come back to them. If you sell, when will you buy? Can you predict the future? Selling during a decline in the share market means you have to make 2 correct decisions - the optimal time to sell AND the optimal time to buy. If you are selling out that means you think it will drop a LOT more and stay down, otherwise you will just hold on and not sell. So what if it doesn't drop any more after you sell? When will you admit you were wrong and buy back in at a higher price? Or will you lean on your confirmation bias and look for news stories supporting your view that this is just a positive blip and it will get lower soon? Then what happens if it doubles in value from when you sold? Surely that is too high so you can't buy back in then?
Trying to time the market is a suckers game, don't play it. Buy when you can, as often as you can, for as long as you can. Gradually, then suddenly you will end up with a lot of money.
When people talk about the love affair Australians and those in other countries have with investment property, and using real estate to get rich, they are really talking about the use of massive amounts of debt. This is using other peoples money to leverage your money into a much larger amount. There is nothing wrong with it if it is done wisely, in moderation, and while understanding the risks associated with it. Let's look at the typical method of buying a house for a young person:
Lily has taken a few years off of buying Faberge eggs and has been saving money towards a house deposit. She now has $100,000 to use for the purchase. She has decided against buying a "forever home" and has instead found a house she'd be happy to live in but that also makes sense as a future investment property. It is close to public transport, in a nice neighbourhood, has a decent sized block of land but is low maintenance etc. It costs $1,000,000.
Lily uses the minimum of $50,000 of her savings as a 5% deposit on the house, with the remaining $50,000 spent on stamp duty and other government fees (around $35,000 for Queensland Australia in 2021 even for 1st home buyers...), building and pest inspections and some furniture to live in the house with.
Lily now has control over a $1,000,000 asset for the measly sum of $100,000. She has leveraged her original money 9 times, adding an additional $900,000 of exposure to assets.
Looking closer at these numbers what has happened? Essentially Lily has LOST half of her original money (assuming the furniture she buys does not have much value after it is bought, which is not exactly true but close enough for this example). Her $100,000 turned into $50,000 after the fees and costs. That is money that Lily cannot get back, and if she were to sell the place she would get hit with another big batch of selling fees (real estate agent fees, inspections, advertising etc.) that would likely wipe out a large portion of the $50,000 she had left after the original buying fees. In reality Lily has "lost" close to all the money she had saved to gain exposure to the $1,000,000 asset.
Why would she do this?
This is a house that will one day turn into an investment property, so Lily assumes that long-term the house will rise in value. While Lily may have "lost" the original deposit money she has gained exposure to something that might accelerate her net worth. Forgetting maintenance costs for a minute - If the house goes up 10% in value she has regained all of her deposit money back. If it goes up 20% she has doubled her original investment. This is why we do it. To double her original $100,000 WITHOUT leverage would - on average - take around 7 years in shares with no leverage. It could be much quicker, but it could be much longer. House prices can often go up 20% in a year or two in Australia, so she might double her money in a much shorter time frame.
This is not without risk though, just ask anyone who invested in regional mining-related towns like Gladstone, Biloela, Emerald etc. in the early 2010's. A 10% drop in the house price after Lily bought it would reduce the value to $900,000, meaning that not only did she lose the $100,000 deposit but she now has a NEGATIVE net worth of -$100,000. that doesn't count the costs of maintenance, council fees etc. etc. that often make home ownership feel like financial death by a thousand cuts.
So if that sounds a bit scary - what about leveraging into shares? The traditional method is called getting a "margin loan". Now THAT is scary! Essentially you own some shares, then borrow against the value of those shares to buy more. Very similar to the home loan example above EXCEPT the buyer fee is negligible. For your $100,000 deposit you might pay <$10 now in fees to purchase another $100,000 in shares. This sounds WAY better! The catch however is in the definition of a margin loan, which means your assets are "in margin". The way these loans can offer extremely low rates, often less than home loans, is that they can IMMEDIATELY sell your shares if the proportion of the total value of the assets that is your money has dropped enough to go below a set threshold (often 50%) and you can't provide the money within a couple of days or even less to top it back up above the loan value. This is typically at a horrible time, for example during a financial meltdown where you've also just lost your job. Fancy losing all your investments savings AND your job at the same time? Not me. For an explanation of it go here, but in reality it is not worth reading as this is not something you should be touching unless you are very well versed in how shares and money work. I wouldn't touch a margin loan nor see any reason I'd ever recommend one to anyone. They are a great way to lose everything very quickly.
Another, newer method of leveraging into shares is with products like the recent NAB Equity Builder. It is similar to a margin loan in that you buy shares and then get a loan from the bank to buy more of them, however it does not have a margin call. This means that if the share market goes down you don't have to top it up or sell any of your shares. The loan rates are a little higher than traditional home loans, and there are restrictions on what shares you can buy (mostly index funds which is good!), but in my opinion this is a great option for young people looking to leverage into shares without the catastrophic risks of a margin loan. But you have to ask yourself do you really want to leverage into shares when you have so little experience with them? Statistically it makes a lot of sense to do it, but psychologically shares are hard enough WITHOUT the leverage. What I do like about this though is that you need a reasonable amount of shares to be able to get a loan, so hopefully you have had some experience with the volatility of the share market to reach this point. My concern is that someone has saved money in the bank, then thought "I want to leverage into shares" so they buy some index funds and get the loan at the same time. This is NOT a good way to enter the market, as the volatility of shares is a shock at the best of times, let alone if you are leveraged into it. If you do however have some experience with the share market, and have had the chance to go through a serious shock (no, that is not a 5% decline in a month) where all the headlines say the sky is falling and you must sell everything without losing your nerve, this could be a great opportunity for you. Remember, the loan is in todays dolllars so both the investment return and inflation are working for (or potentially against) you. Over a 10 year time frame statistically the odds are likely in your favour, but that doesn't mean they will favour you.
Wrapping up - leverage amplifies gains and losses. As of 2021 we are currently in the midst of a generational housing boom. These things happen from time to time and no one knows how or when it will end. FOMO is a huge factor now, so it is understandable that people feel like they must buy a house now, invest in shares, or speculate in dogecoin, or they never will be able to afford it and will miss "the boat". You can backtest pretty much any asset at the moment and say "if only last year I'd leveraged into XYZ I would have made 10 times what I invested and be rich now!". That is hindsight bias, the most accurate and useless type of vision. These assets have gone up that much in large part because of random, unforeseen events ties to one of the deadliest pandemics the world has ever seen. Noone knew what would happen in March 2020 when the world looked like it was on the brink of a depression. If you think shares tanked then, down around 30%, imagine if you had to sell an apartment in a major city within a day? Good luck getting half your money back on that.
While we haven't seen this exact scenario, no one in any of our lifetimes has, history echoes. We've seen situations like this before, and heard every one of the stories about "my child will never be able to buy a house" or "if you don't own this shitcoin/stock/beanie baby/tulip/spice you will be poor forever" over the past decades/centuries whenever there is a runup in prices. Funnily enough, people can still buy houses, invest in shares and blow there money on rampant speculation. Maybe the house is not exactly where you want to live your "dream" life, but there are plenty of places where houses don't cost too much and you can live comfortably on a meagre income. Maybe you do miss a tripling in share prices, or 100x gain in some random crypto coin, but there will always be more opportunities. Just don't blow your finances up in the meantime.
ADDED NOTE: If you are borrowing money to invest in something that provides an income (very important as some shares don't provide a dividend) then it is very likely that you can claim the interest as a tax deduction. If you are on a high salary in Australia, where we have a very high tax rate, this can end up being very beneficial. For example:
If you borrow $100,000 to invest in shares at an interest rate of 3.95% (the current NAB Equity Builder rate at December 2021), you would be paying $3,950 in interest. If you can claim this back on tax at the rate of 37% (which is if your salary is between $90,000 and $180,000) you will have a tax credit of $1,461.50. So essentially it is only costing you $2,488.50 per year in interest after tax to gain another $100,000 exposure to the share market. You do however have to pay tax on the dividends you receive, so you can try and balance this out to maximise your after-tax situation.
See specific tax advice on this, this is just an example.
The strange thing about saving money is that it is pretty straightforward - there are only so many options. You can save it in the bank (cash), or invest it into an asset that you hope will go up in value over the long term (shares, property, bonds, Lily with her Faberge eggs). You can only really save a portion of your income too.
Figuring out how to spend money to me is much harder. For a naturally penurious (read tight-arsed) person like myself it has been difficult to wrap my head around being able to spend money. One of the fascinating things about saving and investing in volatile assets like shares is that eventually (hopefully) you end up with a decent size nest egg, at which point your salary from your job and even how much money you spend (within reason) kind of becomes irrelevant. To invert the great Peter Bernstein's classic book, you're now "With the Gods". Here's how it works:
When you have no savings, your salary and ability to spend are perfectly correlated. If your salary is $500 you can spend $500. If you spend less than that you are saving money, if you spend more than that you are going into debt. The former is essential to get ahead, the latter is dangerous and can get you into serious financial problems.
If you have savings in a bank account which has interest at roughly the level of inflation, then the money you have saved already is neutral. In 10 years time it will be worth the same amount in terms of spending power. So again, if you spend less than your salary you are saving money and your assets are increasing. However, now if you spend more than your salary you are not necessarily going into debt as you have some money saved up. What you are doing though is reducing your savings as the money you have saved up is going down.
So far it has been all straightforward. Where it gets interesting is if you have that money invested into assets like diversified shares. After adjusting for inflation, the US share market has had a capitalised annual growth rate of nearly 7% from 1972 to 2021. The key part here is after inflation, as this means that any money you have invested in US shares in this period has "on average" gone up around 7% each year more than it was worth at the start of the year. So here's how you can spend more than your salary, or even spend DOUBLE your salary, but still be saving:
Marsha has $1,060,000 invested in US shares. She earns $60,000 per year after tax in salary from her job. Marsha is jealous of Lily's Faberge egg collection and decides she must get her own. Marsha has a year where she goes nuts and spends $120,000 that year, which is twice her salary, on lifestyle and trinkets. To do that she takes $60,000 out of her shares at the start of the year to fund her lavish lifestyle. Her remaining $1,000,000 shares go up the "average" amount that year. At the end of the year despite this heavy spending she has:
$1,000,000 * 1.07 = $1,070,000.
So in a year when Marsha spent WAY more than she made from her job she still managed to finish the year with more money even after accounting for inflation. Isn't that awesome!
The average real return over this period was around +7%, but the standard deviation was around 16%. This is where the "With the Gods" comment comes in. Let's look at 2 different scenarios:
The Gods DON'T like a spendthrift Marsha:
Instead of getting the average return, Marsha gets a return of -25% which is 2 standard deviations BELOW the average. While not a common occurrence it definitely can happen on rare occasions. So Marsha now has:
$1,000,000 * 0.75 = $750,000.
In a year when she decided to splurge and spend an extra $60,000 her savings have gone down by $310,000! That has to hurt.
The Gods DO like a spendthrift Marsha:
Instead of getting the average return, Marsha gets a return of +39% which is 2 standard deviations ABOVE the average. Again, while not a common occurrence it can happen on rare occasions. So Marsha now has:
$1,000,000 * 1.39 = $1,390,000.
In a year when she decided to splurge and spend an extra $60,000 her savings have gone UP by $330,000! That has got to feel great!
Understanding this has made it much easier for me to spend money in a purposeful way. In some ways this variability as helped me psychologically as I now understand that so much of it is outside my control. The somewhat "extreme" example of spending double your salary in a year, but it having a limited impact on your savings relative to the fluctuations in your investments, reinforces that once you have a reasonable net egg small or even moderate amounts of additional spending or saving mean little in the grand scheme of things. If you want to shout a fancy lunch or buy a new keyboard for your students - go for it ;)
Money Dials: analyzing your spending habits with Ramit Sethi (iwillteachyoutoberich.com)
Ramit Sethi has some good stuff about purposeful spending. Spend money freely on things that make you happier, and spend nothing on things that don't. That's why I don't have a fancy car, they make me LESS happy as I'm worried about scratching it, parking it in student car parks etc. My POS car does everything I need, and I'd happily lend it to any friend without any worries about it. It also allows me to spend money on friends, minor extravagances etc. and not even think about it - I figure I save at least $5000 per year on depreciation, servicing, interest, insurance etc. which is around $100 per week. This money can be spent on things which give me a happiness hit like buying flowers for people, building up my library of books, buying lunch for a friend etc.
How much cash do I need on hand? This is the hardest question you will have to answer. Statistically when you are very young (eg. early 20's), and if you have a consistent job that you enjoy, the "correct" answer is almost none. You could live paycheck to paycheck, investing everything that is left over each week. Any large expenses that need to be paid straight away (eg. car servicing, unplanned trips) you could put on a credit card with a long interest free period and then save for the next few weeks and pay it off. If you don't save enough you simply sell enough shares to pay whatever is left over. Same goes for any large expenses that a month of savings can't pay off - just sell your shares.
I couldn't live like that.
For a robot that would work really well, however for me that would require too much looking at money which I don't want to do. For an older (Maria edit: this should just say "very old") person with, kids(s) a house and mortgage it makes sense to have a reasonable amount in an offset account. Have as much in there as will keep you from stressing out if the market goes down or you have a big expense come up (leaky roof? rotten deck?). Money in an offset account is returning - tax free - the mortgage rate so is a pretty good investment anyway.
For a younger person without those responsibilities it makes sense to look at how much your typical expenses might come to in a month, then double that. This become your "cash on hand" threshold. You then set a threshold for savings so that once you get XX dollars above the threshold you invest everything above the threshold into diversified shares.
Lily spends $3000 per month on rent, food, car servicing, hair products and faberge eggs (her guilty pleasure!). She therefore sets her "cash on hand" threshold at $6000. She earns $4000 per month after tax, meaning she saves $1000 per month after expenses. By saving like this Lily could get to her $6000 threshold in 6 months, then set her investing threshold as $9000. Every time her bank account hits $9000 (roughly every 3 months) she invests every dollar above $6000 into diversified shares. Simple, easy, and over the long term (20+ years) likely to produce amazing results. With this method you always have between 2 an 3 months of expenses in cash, plus maybe a credit card, in case of emergencies.
You can have separate accounts, for example the "cash on hand" account and another that you use to save towards the investment. Do this if you don't trust yourself not to see the "big" numbers and splurge too much. Or you can just keep it all in your normal savings account if you want to make it easy.
Just make sure to include some fun money in your monthly expenses - you're only young once so enjoy yourself! You can also cycle through credit cards building up points for flights, hotels etc. so that you are not saving money but also building up holidays as well. Don't miss out on life just to save money. Remember that money is pointless, it just buys you time and opportunity. Investing early and hard means you can career change, raise a family, take a year off etc. much more comfortably in your later years. But investing too much means you miss out on life.
One of my favourite blog posts - which lead to one of my favourite books - about what money is
The Psychology of Money · Collaborative Fund
This is a good one about how no one wishes they worked more or had more money when they are on their deathbed
The Nothingness of Money (moretothat.com)