It’s a fair question and plenty of people get stuck on it. You’ve got a bit of money spare for the first time in a while, and you can’t work out whether it should go on the credit card or into something that grows.

Australia’s existing investors are middle aged, with an average age of 46. Among those who intend to start investing, the average age is just 34.

Source: ASX Australian Investor Study 2020

So the typical Australian investor is roughly twice your age, and even the ones only just working up to it are in their mid-thirties. Which means if you’re reading this in your 20s, you’re not behind. You’re about fifteen years early.

That’s worth sitting with, because the thing that makes money grow is time, and time is the one thing you have more of than almost anyone else out there. So let’s sort out the order, and this decision gets a lot easier.

So what is the order?

Three steps, and they go in this sequence.

First, a small buffer. Not three to six months of expenses, just $1,000 or $2,000 sitting in a separate account. Without it, the first flat tyre goes on the credit card and you’re right back where you started.

Second, the expensive debt. Credit cards, personal loans, buy now pay later. Anything charging you a high rate is costing you more than an investment is likely to make you, so clearing it is the best return available to you.

Third, and only then, you start investing. Not because investing isn’t important, but because investing while you’re paying 20% on a credit card is a bit like filling the bath with the plug out.

Why does starting sooner matter so much?

Because of compounding, which is the dullest word in personal finance attached to the most powerful thing in it.

Compounding just means your money earns a return, and then that return earns its own return, and so on. It’s slow and unremarkable for a long time, and then it isn’t.

Let’s put it in real numbers. Say you put away $100 a month and it grows at 7% a year. After 10 years you’d have put in $12,000 and you’d have somewhere near $17,000. After 30 years you’d have put in $36,000 and you’d have somewhere near $120,000. So you tripled what you put in, and the balance grew about seven times over. That extra came from time, not from you.

Those figures are an illustration, not a promise. Real returns go up and down, and some years they go backwards. The point isn’t the exact number, it’s the shape of it. The person who starts at 25 with small amounts usually ends up ahead of the person who starts at 35 with bigger ones, and not because they earned more.

So does saving even matter, if investing grows faster?

It matters enormously, because saving is the habit that makes investing possible at all.

You can’t invest money you never managed to hold on to. Every investor you’ve ever heard of started by having something left over at the end of the week, and the only reliable way to have something left over is to move it out of your everyday account before you get a chance to spend it.

So set up an automatic transfer for the day you get paid. Even $20. The amount matters far less than the habit, because the amount grows as your income does, and the habit is what carries the whole thing.

Not sure where your own gaps are?

Before you spend anything, you’re welcome to do the Money Health Check. It’s ten questions about how your money actually works right now, it takes about three minutes, and at the end you’ll get a score out of 100 plus the one thing worth doing first. If it turns out you’re already sorted, I’ll tell you that.

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What about choosing what to invest in?

That’s the part I’m deliberately not covering here, and I’d rather be straight with you about why.

I’m not a licensed financial adviser and I don’t hold an Australian Financial Services Licence, so I can’t and won’t tell you what to buy. Beyond that, the basics of investing take longer than a web page to teach properly, and half-explained is worse than not explained at all. Half-explained is how people end up putting money into something they don’t understand.

So we do it properly in the course, where there’s time to ask questions and time for it to land. If you’d rather read up on your own first, Moneysmart is run by the Australian government, has nothing to sell you, and is the best free starting point in the country.

What can you do this week?

  • Work out whether you’ve got that first $1,000 buffer, and if not, make it the goal
  • List every debt you’ve got with the interest rate written next to it, highest first
  • Set up one automatic transfer for the day you get paid, however small
  • Put a date in your calendar next month to look at it again, so it doesn’t become a one-off

None of this asks you to be good with numbers or to pick the right thing. It asks you to go in the right order, and to start before you feel ready. Which, for what it’s worth, is when everybody starts.

And if debt is the thing keeping you awake at the moment rather than investing, the National Debt Helpline (1800 007 007) is free, confidential, and a good place to start.

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A few common questions

For most people the order is a small emergency buffer first, around $1,000 to $2,000, then any high-interest debt like credit cards or personal loans, and then investing. Clearing a debt charging you 20% is a better and more certain return than most investments are likely to give you.
Less than most people assume, though the more useful question is whether the habit is in place. Someone putting a small amount away every single pay tends to end up well ahead of someone waiting until they’ve got a big lump sum, because they’ve given it more time.
Not at all. Compounding rewards time, and at 30 you’ve still got decades of it. The best day to start was years ago and the second best is today, which is a bit of a cliche but it happens to be true.
No. The concepts that matter most, spreading your money around, keeping costs low and leaving it alone for a long time, are ideas rather than calculations. If you can follow a recipe you can follow this.