Are you interested in investing, but have no idea where to start? The first place I always encourage people to invest is in their Tax Free Investment Accounts...

This is the next instalment in a series designed to help  each and every one of you to live a financially free life, today we’re going to talk about where to invest for your long term future. From getting out of debt, to making a budget, to putting in place a system of accounts that helps you ensure that you always have money, to investing tax free, I've got you covered.

When you are free from money stress, you can use all your energy on loving your family and sharing your amazing talents with the world.

Show Notes

• [01.46] The first thing you need to do is get out of debt

• [03.24] The next thing you need to do is learn to love the budget – tracking and planning your money

• [04.16] Thirdly, you need to  put in place a system of accounts that help you ensure you always have money

• [05.42] How Tax Free Investing Works

• [06.17] Why do I recommend this as one of the first places to invest?

• [07.41] So what should you invest in?

• [10.19] Investing in a Passive Share Tracker

• [12.38] Should you invest monthly, or one big lump sum?
  
  

Related posts and episodes

How much is enough?

Investing Tax free!

Optimising tax on your investments

The decision tree you need to choose your investment

The four foundations of investing

Four things you need to know about your home(financially)

Why you should invest offshore

Why your home is NOT an investment

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Quotes

"First things first – just INVEST." - Lisa Linfield

"When you change the way you think about it and realise that tracking your money makes you far more mindful of exactly how much you’re spending, you get to see it in a new light." - Lisa Linfield

Script:

Investing Tax Free!

Hello everyone and welcome to today’s episode of Working Women’s Wealth.  I’m Lisa Linfield and I’m building a community of Women who are committed to the journey of living Financially Free lives – whether they’re just beginning, or nearly there, we support each other through our lessons learnt, good and bad, so ALL may benefit.

In these last few episodes, we’ve been talking about how to set up your money to help you succeed in wealth.  To me, one of the amazing features of living your Best Life is a life where we don’t have to worry about things that aren’t important.  We get to spend our time worrying about the people we love, how to change the world, to make it a better place.

Unfortunately, you don’t get to be worry free if your health is a challenge and your money is in a shambles.  Money worries are the biggest energy drain for so many people and the source of much stress in many marriages and lives.

My dream for each and every one of you is that you get to live a financially free life.  Where you are stress free from money so you can use all your energy on loving your family and sharing your amazing talents with the world.

Sounds good right?

So how do we do it?

The first thing you need to do is get out of debt

From episode 166 to 170 we talked a lot about debts – recognising that apart from emergencies that happen to us, debt is usually the result of faulty thinking.  Believing bad information. 

One of the tricks I taught in that episode is that you need a currency of conversion.  Just this week my daughter bought take away online for the very first time by herself.  Now she absolutely LOVES chocolate.  So when we translated that she could have bought 8 chocolate bars for how much her take away cost, she immediately grasped the concept.

Key here is to know exactly how much in rands and cents, pounds and pennies, or dollars and cents you’re paying each month for the lender to sit on the beach.  That’s my currency.  Vacations.  Everything we spend money on is translated into weekends away, vacations to the beach etc.

My husband John’s currency is work days.  He always says he’s never quite been able to upgrade his aeroplane ticket to business class because he translates it into how many days he has to work for the difference, and he’s never come to the conclusion it’s worth it!

The next thing you need to do is learn to love the budget – tracking and planning your money

I know, I know, for most of us we think there’s no way on earth that will ever be a good thing.  But when you change the way you think about it and realise that tracking your money makes you far more mindful of exactly how much you’re spending, you get to see it in a new light.  In episode 171, I showed how a tracking your spending against your budget, helps you pick up money leakages, like debit orders you don’t need, and helps you protect your financial freedom future by helping you prioritise your money so you save FIRST for your future and then spend on now.

Thirdly, you need to  put in place a system of accounts that help you ensure you always have money

In last week’s episode, 172, we talked about the fact that money is like water – we need to make sure we have a constant supply to take care of our needs now AND make sure we have a system of water tanks to take care of us in an emergency, and in our future. 

Those five tanks were

1. The transactional account your income and daily expenses come out of

2. A cashflow smoothing account were you save automatically each month for those things that aren’t monthly expenses – like vacations, doctors money, tax, gifts, maintenance on your car and house etc.  It’s no point having a line item in your budget, and then using up that money each month.  Our income may be consistent, but expenses NEVER are.  They’re lumpy bumpy and cause people to use debt when they don’t need it.

3. An emergency fund that contains 3-6 months of expenses for EXTERNAL things that happen to us.  Unexpected things like medical emergencies, car accidents, hot water geyser’s bursting etc.

4. A Goal Saving account if there’s a goal you know you need to save for – like the deposit on a house, your next car so you can pay it cash, or a child’s university education.

5. Lastly, Long Term Investments.  This is to make sure that you can stop working as soon as you possibly can – or put yourself in a position due to financial freedom that you can choose When to work, Where to work, With Whom to work and only do work that gives you purpose.

Today we’re going to talk about where to invest for your long term future.  The first place I always encourage people to invest is in their Tax Free Investment Accounts

How Tax Free Investing Works

In each country these are called different things, but the principal is the same.  In the UK, they’re called ISA’s, In the US they’re called Roth IRA’s and in South Africa they’re called Tax Free Investment Accounts or Tax Free Savings Accounts.

All of them have a maximum limit each year that you can put in these accounts, and my recommendation is to maximise that limit for most people – putting in as much as you can.  If you are married or in partnership with someone, you need to each maximise your personal limit.

So here’s how they work.

1. Your income is taxed normally

2. You then set up an automated payment / direct debit / standing order to go off your account each month to that Roth IRA/ ISA / Tax Free account. 

3. Whilst the money is inside this investment, it gets to grow TAX FREE.  This means you don’t pay dividend tax, you don’t pay tax on any interest you earn – and this can save you a whopping amount over a number of years.  So you get to earn the full amount, and earn more free money on free money (or compound growth) as that money that would normally go to the government for tax, stays in your account.

4. When you need the money, you get to take it all out without paying tax.

Why do I recommend this as one of the first places to invest?

Now I don’t know your personal circumstances, so you need to do the homework for you personally.  But let me take you through my thinking on this.

My first exception to investing here is if your employer has a match scheme – whereby they will match your contributions if you put it into a retirement account.  Then, that’s a no brainer… well, most of the time.  Just study the fine print.

So let me take you through why I like these.

●        You’ve already paid the tax on the money you earned… so you know for sure that what you’re the balance is in your account is yours to keep.

o   The challenge with almost all other retirement accounts is that your income goes in untaxed – which means that you still have to pay tax on that money when you retire.  So you look at your retirement fund and you think, Man, I’m so lucky, I have a million!  No you don’t.  You have a million minus the tax you’re going to pay. 

●        The second thing I love about it is that for people who never have invested before it gives them their first target to hit for the year - $6,000 for a Roth IRA, £20,000 for an ISA and R36,000 for a Tax Free Investment account.  Break that into your monthly target, of $500 or £1,666 or R3,000 and work towards it as your first goal to hit.

●        Because it’s usually not your entire investment over time, but a small portion of it, the investment strategy can be a lot more risky – and it doesn’t break the bank – but more on that later.

●        In some countries, these accounts are safe from creditors – not all, but in some countries.  And in some countries they can be structured like retirement funds so that you can leave them to your family should you die and they skip the hassle, time, trauma and executors fees of normal investments.

So what should you invest in?

Now investment advice always depends on your circumstances – your personal risk tolerance, your age, whether this is your only investment or a large part of your investments, how long it’s going to stay invested and many other factors. For more on that, please look at Video 7 or Episode 4, or read the article I wrote on Working Women’s Wealth called ‘Here’s how to start investing’.

So the information I’m about to give you are some strategies you can consider, but you need to consult your personal financial adviser for your own investment recommendation.

Let’s take the first most important factor – TIME

●        You must NEVER withdraw this money.  Like a Retirement Fund, you need to pretend that this money doesn’t exist.  That it’s never in your thinking.  Don’t even consider that you have access to it.  Put in place your investment strategy and don’t even think about the money.  Sure you need to manage your investments, but this is one you need to leave for the VERY long term.

●        If you have at least 5 years or more, but definitely 7 years, consider this strategy I’m about to tell you.  I even tell my retired people to maximise these Tax Free Investments and leave it for later.  If you retire at 65 – you can consider this money for 75 or onwards!!!!

My recommendation is if you’re investing for 7 years or more, put the money in a Passive Share Tracker either of your own country if that’s what is available to you, or in the world index.

WHOA, the WHAT?

Investing in a Passive Share Tracker

For the full episode on Active vs Passive investing, go back to Episode 13 when I interviewed industry veteran Niki Giles and she explained it all.  But let me give you a brief summary here.

Every country has a stock market – a place where companies go to list their shares so that normal people like you and me can give them money to own a piece of their business.  So if you own a share in Microsoft for example, you didn’t physically go to the company and buy a tiny corner of their business.  You buy the share from the stock exchange.  Some countries, like America, have a few – The Nasdaq, The Chicago Exchange etc.  In the UK, they have the FTSE, and in South Africa, the JSE or Johannesburg Stock Exchange.

An index allows you to buy a piece of every single country that it tracks.  So if you buy a unit of the All Share Index on the Johannesburg Stock Exchange, you are literally buying a tiny weeny fraction of every share on the stock exchange.  Same as the S&P 500.  Sometimes, you can buy just the top 100 companies – like in the UK they have the FTSE 100 index.

What these funds do is allow you to not be an investment guru and try and pick the ONE share that’s going to do well.  Their goal is to TRACK as closely as possible the stock exchange they track.  That’s why they’re sometimes called Trackers or Indexes.  And they’re referred to as Passive as there is no major stock selection – they follow the whole market or the top 100 shares.  The people who manage them don’t get to actively choose what share goes in or out.

As a result, they are WAY cheaper to buy, and so your hard earned money doesn’t get spent on fees.  And if you’re investing for 7 or more years, then those fees can add up.

Should you invest monthly, or one big lump sum?

Well, my advice on this is always – first things first – just INVEST. 

And then, as always, it depends on you personally.

If that investing money is a bonus, or one off lump sum, and you’re likely to spend it if it sits in your account, then invest your annual allowance all at once.  That’s called behavioural finance – which means prioritising your action to prevent your likely behaviour.

If that’s not a problem, or it’s part of your monthly income, then the best way for me is to do a monthly debit order.  Like I said last week – the great thing about monthly debit orders the investment companies take from your accounts is that they go off like clock work the day your salary goes off your account.  Because of inertia, we’re unlikely to stop them, and so they just keep taking money from your account each month.  And, because it’s the investment company taking the money, it’s a hassle to phone them and stop the debit order.  So you tend to stay investing.

So friends, start investing today.  Go through the pain of setting up your debit order, no matter how small it is, and take that next step to financial freedom.  If you want to download your free PDF on the 6 Things You Need To Consider When You Invest, please do head to the show notes of this episode at WorkingWomensWealth.com

I’m Lisa Linfield, and this is Working Women’s Wealth.