Why you should treat investing like a subscription

You could potentially turn $50 a week into $113,919 in 20 years by treating investing like a subscription.

Many of us think nothing of having the money for our Netflix or Stan subscription come out of our bank account or having our gym membership fees deducted each month, but what if you took a similar approach with investing? By that, I mean arranging for money to automatically be invested each month the same way you’d pay for a subscription.

There are a number of benefits of treating investing like a subscription. For one, it means that you are adding to your investments regularly rather than investing when you have some extra cash. You may find smaller amounts easier to part with than a lump sum. It is also set up automatically so that you can set and forget – it’s not something that you have to keep thinking about.

Of course, there is also the fact that you could potentially turn $50 a week into $113,919 in 20 years by treating investing like a subscription. Let’s take a look at the benefits in more detail.

Financial benefits

Compound interest

“If you think of investing like your Netflix subscription, the improvement in your long-term wealth can be fantastic,” Chief Market Strategist at InvestSMART, Evan Lucas, told Canstar. “First and foremost, it comes down to the simple maths of compound interest.”

Compound interest, which Albert Einstein is said to have described as the “eighth wonder of the world”, is essentially where you earn interest on top of any interest already earned on your savings.

“If you consistently add to your investment – even if it’s as little as $100 a month – you will significantly accelerate your returns,” Mr Lucas said.

Just take a look at the table below which shows how regular investments can grow over time. As you can see, based on the hypothetical examples, if you had started investing $20 a week 10 years ago your investment balance would now be about $14,552 – $10,400 of that is the amount you would have invested and $4,718 are the total earnings before fees. This is based on an average annual net total return of the S&PASX 200 over the 10 years to 6 January which was 8.19%pa.

Over the longer term, the results are even more impressive. If you had invested $50 a week over 20 years that would have grown to  $113,919. This is based on an average annual return of 8.77%pa. As you can see from the table, the total earnings of $63,815 are higher than the amount invested of $52,000.

The impact of regular investing

← Mobile/tablet users, scroll sideways to view full table →

Source: www.canstar.com.au. Prepared on 9/01/2023. Based on the weekly net total return of the S&P/ASX 200 Index over the past 10, 15 and 20 years (effective to 6 January 2023); assuming there are 52 weeks in each year. Calculations include the average account keeping fee and brokerage of a selection of micro-investing platforms, with the account keeping fee charged at the end of each year. Other taxes, transaction costs or account fees may apply. Actual returns and fees will vary by investment product. The value of your investment will rise and fall over time. Past performance is not a reliable indicator of future performance.

Dollar cost averaging

Another advantage of regular investing is something called dollar cost averaging. When you invest a set amount in regular intervals – this might be monthly or quarterly – you end up buying more shares when prices are lower and fewer shares when prices are higher. This can bring down the average price you are paying.

Mr Lucas offered this example. Let’s say you buy 1,000 shares at 90 cents each and then another 1,000 at $1 each, then the average price is 95 cents per share.

“If you consistently keep adding money to your investments you don’t have to worry about short-term market gyrations. It can help smooth out the volatility of the market,” Mr Lucas explained.

There’s less pressure

Setting up automatic investments is an easy way to ensure you contribute regularly whilst removing the pressure of deciding when to make each investment, said Robin Bowerman, Head of Corporate Affairs, Vanguard Australia. “Not only do automatic investments simplify the process, it also discourages risky investment behaviour such as market timing or following the crowd.”

Psychological benefits

“There is a lot we can learn from companies commercialising their offering through a subscription model, leveraging many of our decision-making biases that we can also take advantage of to improve our own financial status,” behavioural economist and co-founder of Decida, Phil Slade, told Canstar. He said there are four biases in particular that play a huge part in why subscriptions are so effective.

It’s easier to keep the status quo than opt out

The first one Mr Slade described as the “opt-out bias”.

“After the initial decision to purchase, you find yourself in a situation where you have to ‘opt-out’ of the spending pattern. In this situation people are more likely to stay with the status quo rather than change, the easiest decision is to keep going and our brains love the easiest path,” he explained. “The same applies to our investment. Once we make the decision to direct a percentage of our wage to investments it’s easier to keep the status quo than have to make the decision to opt-out.”

You get a greater level of satisfaction

“Investing $100 per week over the course of a year that you can see growing over time feels more satisfying than a one-off investment of $5,400,” Mr Slade said. “It’s like we are setting up a journey, a goal that we are striving to attain, a race that we know we can win – and we all love winning.”

It’s all about the numbers

The third bias is what Mr Slade described as a “weird neurological quirk called mental accounting”.

“In mental accounting, we create subgroups of spending rather than simply looking at the bottom line. For instance, if we allocate $100 to groceries every week we might look to save $4 off a particular item, and then think nothing of spending an extra $20-$30 on a few extra drinks if we’ve given ourselves a budget of $100 for a night out,” he explained.

“In the same way, if we put investments into a weekly spend cycle our mental accounting bias will likely make sure we spend all of that money on investments and problem solve how we live off the balance.”

You avoid the “pain of loss”

According to Mr Slade subscriptions subvert our human instinct to avoid loss. “Any form of loss is interpreted by our brains as painful – and our brains strive to avoid pain,” he said. “If you see $1,000 in your account and decide to invest $400, that feels much more painful than if the $400 comes out automatically and you only see $600 in the first place. In this situation it feels more like your pay is actually $600.” He added this is why superannuation and tax are taken out before the money hits accounts – it makes it less painful.

 → You might also like: Nudge theory: How it can help you make better money choices

How to get started

If you have decided you want to try treating your investment like a subscription the first thing you will need to work out is how much you can add towards investing each month – or from each pay.

The next step is to decide how you will invest your money. There are a number of micro-investing platforms that can help you start investing with smaller sums. Some of the providers in Australia include Sharesies, CommSec Pocket, Raiz and Stake. They all work differently so it’s best to compare the options to decide which one is right for you.

If you want to invest directly into shares or ETFs yourself, though, you will need at least $500 to get started. It’s also worth noting that investing smaller sums regularly will mean brokerage costs will add up.

If, for example, you invested just $100 and the brokerage was $20, you’d need your investment to increase by at least 20% to break even – and that’s before you take into account the brokerage fee to sell your investment, explained Mr Lucas.

One way to save on brokerage is by arranging for the money to automatically go into a savings account each payday and when you’ve accumulated a certain amount – say $1,000 or $2,000 – you can invest in shares or ETFs. “This way the brokerage won’t have as much of an impact,” explained Mr Lucas.

“If you save money and transact every quarter it will be just as advantageous over the long term as investing monthly.”

Cover image source: Cagkan Sayin /Shutterstock.com

Thanks for visiting Canstar, Australia’s biggest financial comparison site*