Where to invest $50 per week: Cash v mortgage v super v sharemarket

You have worked out that you can spare $50 a week – where is the best place for you to invest that money? We compare four possible options.

Australians have been growing savings at record rates during the pandemic. The Australian Bureau of Statistics reports that households have $1,342 billion tucked away in deposits. But is a savings account the best place to stash your cash when interest rates are at historic lows?

We look at four different options for putting away $50 each week and the pros and cons of each. Plus, the Canstar research team has crunched the numbers to show the possible results if you stick with the habit for 10 years. Keep in mind that these are hypothetical scenarios and the numbers will vary based on your individual situation.

Put it in a savings account

The pros

Savings accounts are safe, coming with a government-backed safety net for deposits of up to $250,000 per account holder per financial institution.

Better still, it should cost you nothing to add to, or access, your savings. Another plus is that your account balance won’t be impacted by the ups and downs of financial markets, something that can happen with more lively assets such as shares.

The cons

Low risk generally means low returns, and the security of savings accounts will see your money earn a low return. Right now, the average bonus saver rate is an uninspiring 0.58%. Returns on cash are also fully taxable, and a high-income earner can lose almost half their interest earnings to tax.

A chief drawback is that cash savings don’t notch up capital growth. On the contrary, the purchasing power of your money will be whittled away by inflation over time – something to be mindful of if you’re planning a long-term savings regime.

The results

Deposit $50 each week into a savings account paying 0.58% interest, and in 10 years’ time, you could accumulate $26,766. It’s a tidy sum. The problem is that you – and not your savings – have done the heavy lifting. Of that final balance, a mere $766 is interest income, and that’s over an entire decade.

Putting $50 per week into a Bonus Saver Account for 10 years

Source: www.canstar.com.au. Prepared on 07/10/2021. Based on weekly contributions (at the end of the week) into a savings account paying an interest rate of 0.58% (current average bonus saver rate). Calculations assume there are 52 weeks in a year.

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Pay more off the mortgage

The pros

Paying extra into your home loan has a lot going for it. It’s a simple, low-risk way to save thousands in long-term interest and become mortgage-free sooner. If you need the cash in an emergency, it can normally be clawed back through redraw.

The cons

There aren’t many downsides to paying more into your mortgage. However, with home loan interest rates at rock bottom lows, your money could potentially earn a better return elsewhere.

The results

Let’s say you make extra payments worth $50 each week into a $400,000 mortgage with a variable rate of 3.13%. Over a 10-year period, you could potentially save $4,502 in interest and cut more than two years from the life of your loan.

Putting $50 per week into a $400,000 mortgage with a 30-year term for 10 years

Source: www.canstar.com.au. Prepared on 07/10/2021. Based on weekly principal and interest repayments, with interest calculated daily and charged at the end of the month using an interest rate of 3.13% (average owner-occupier variable rate). Calculations assume there are 52 weeks in a year.

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Top up your super

The pros

Adding a bit extra to your super is a simple way to grow retirement savings. Making contributions of your own can even see you score tax savings today. Workers can claim a tax break for up to $27,500 in annual super contributions. This includes your employer’s contributions, so if the boss chips in, say, $12,000 during the financial year, you may be able to claim a tax deduction for up to $15,500 of your own after-tax contributions.

The cons

Superannuation is designed solely to fund our retirement and to ensure it does exactly that, it’s locked away for a long time – typically until age 60 if you were born after 1 July 1964. For a 20-something that can mean waiting 40 years before being able to access their super. And it’s a fair bet that during this time, the rules around super may change as they have in the past.

The result

As our table shows, a 30-year-old who adds $50 to super each week for 10 years could boost their super savings from $153,181 to $192,553 by age 40. That’s an extra $39,372 in one decade – money that will go on to earn further compounding returns over time.

More than $13,000 of the increased super balance comes from investment returns – that’s 17 times more than the returns earned on a savings account over the same period.

Contributing the equivalent of $50 per week to superannuation for 10 years from age 30

Source: www.canstar.com.au. Prepared on 07/10/2021. Scenario begins at the start of the 2021-22 financial year. Starting balance taken from APRA Annual Superannuation Bulletin June 2020. Gross annual income based on the median full-time earnings for ages 25-34 from ABS Characteristics of Employment, Aug 2020. SG Contribution amounts per government announced rates and after-tax contributions are assumed to be paid into the superannuation fund on a monthly basis. Employer contributions are taxed at 15%. Net investment returns based on the average annual five-year return of balanced investment options available for a 30-year-old on Canstar’s database (with returns effective to 31 Aug 2021). Average life and TPD insurance premium of $285.46, is assumed charged at the end of each year based on products available for a 35-year-old on Canstar’s database. All information on income and superannuation performance returns are used for illustration purposes only. Actual returns and the value of your investment may fall as well as rise from year to year; this example does not take such variation into account. Past performance is not a reliable indicator of future performance.

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Invest in the sharemarket

The pros

About 6.6 million Australian adults, or 35% of the population, own listed investments according to the ASX Investor Study 2020. Much of the appeal of shares lies in the opportunity to earn healthy long-term returns through a combination of capital growth and regular dividends. Over the past 10 years, for instance, shares have notched up average gains of 10.19% annually (including dividends).

In addition, shares can be tax-friendly. Hold onto your shares for more than 12 months, and you’ll only be taxed on half the capital gain. Dividends can be lightly taxed too – even tax-free if your personal tax rate is below the full company tax rate of 30%.

If you’re not sure which shares to pick, one option to consider can be exchange-traded funds (ETFs) that focus on Aussie shares. ETFs offer the added benefit of diversification as you’ll gain exposure to a broad basket of underlying shares.

The cons

The minimum marketable parcel on the ASX is $500, so if you plan to invest $50 each week, you’d need to save until you reach an investable sum, or use microinvesting options such as Raiz, CommSec Pocket and Sharesies which let you get started with smaller amounts.

Investing in shares does come with costs including brokerage if you take the direct path, or monthly fees (usually below $5) if you choose microinvesting. If you opt for ETFs, management fees apply though these tend to be below 0.5% annually.

The biggest downside of shares is that your returns are not guaranteed. In fact, sharemarkets can swing wildly, and in some years you may record a loss, while in others the market can streak ahead. Bailing out at the first sign of a market downturn can mean selling shares at a loss even though they may go on to recover their value and reach new highs, further down the track. The upshot is that you need to be able to handle market volatility.

The results

By investing $50 weekly through a microinvesting app, it can be possible to grow a portfolio worth $42,529 in 10 years. Of that total, more than $17,000 comes from investment returns – 22 times the likely return on cash savings.

Investing $50 per week in the ASX200 for 10 years

Source: www.canstar.com.au. Prepared on 07/10/2021. Based on the weekly net total return of the S&P/ASX 200 Index over the past 10 years (effective to 5 October 2021) equating to an annual return of 10.19%. Calculations include the average account keeping fee and brokerage of a selection of microinvesting platforms, with the account keeping fee charged at the end of each month. Total charged assumed over the 10 year period to be $234 in brokerage and $237 in account keeping charges. Calculations assume there are 52 weeks in a year. Taxes and other transaction or account fees that may apply have not been considered. 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.

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The verdict

It’s always a good idea to hold rainy day savings but as our results show, if you’re looking at an extended timeframe, a savings account is unlikely to deliver the best result. Paying off your home loan can be a low-risk strategy that can provide far more bang for your buck. For supersized returns, shares have the potential to deliver strong returns over time, though it does mean taking on more risk. If you’re heading towards retirement, adding just $50 a week to super can give your retirement nest egg a valuable last-minute uptick with possible tax savings along the way.

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