basket showing eggs over-written with sources of funds to investHow can I set aside funds to invest?

When considering accumulating wealth for future purposes, enquirers are often concerned as to how they might be able to source funds to invest – they are struggling to meet the daily/ recurring costs of living as it is! Longer term goals giving rise to such concern include: a level of financial independence in retirement; for estate planning bequests; or for establishment of a philanthropic foundation/ fund.

In dealing with this topic it is worth considering the difference between the terms, ‘savings’ and ‘investments’. For purposes of this article, we will apply the following definitions for those terms (précised from Investopedia dictionary – where you can search terms if you know the starting letter):

Savings: the accumulation of the difference between inflows (whether income, realisation proceeds, or other sources); and outgoings for the normal and necessary costs of living (including debt servicing): often considered a ‘reserve’ (or set aside for a specific acquisition or purpose).

Investments: moneys ‘placed’ with the expectation that growth and/ or income will be generated.

‘Savings’ will generally have a relatively short-term focus, whilst ‘investments’ have a longer-term aspect to them. Over the course of a lifetime, various sources of funds to invest may present themselves: some of the more conventional ones include –

  • Accumulated savings (initiating investment);
  • Recurring surplus cashflow (increasing investment);
  • Bequests, gifts or other ‘windfall gains’ (increasing investment);
  • Proceeds of sale of assets (increasing investment); and
  • Various forms of borrowing (debt) – increasing investment.

Another source of funds for investment is the growth in capital value of existing investments. Using this added ‘equity’ in your investment portfolio needs to be carefully considered so as to minimise any taxation consequences – and to follow strategic goals.

Regardless of the source of the funds for investing, embarking on the investment process should be under a well-thought out strategic plan relevant to your personal needs, goals and circumstances. Unless you have expertise in the area, you are urged to consider following the fewer than 40% of investors (in Australia) who use a financial planner and sleep better at night feeling confident in their plan because of that engagement. Utilising such a strategy will include advice on how to marshal the available resources to achieve an outcome in your best interest – and should be reviewed regularly according to an ongoing service option with which you will be comfortable.

The abovementioned sources of funds to invest are further discussed here:

Accumulated savings

One of the goals of a savings plan may be to initiate an investment portfolio in one form or another, perhaps to make a purchase in full payment; or to make a deposit and support that with either ongoing regular contributions – or with ‘gearing’ (borrowed funds – see below). Discipline may need to be exercised with such accounts, to ensure that ‘wants’ are not satisfied at the expense of ‘needs’ that are the real intention of the saving being accumulated.

These accumulations are generally for short-term purposes and as such, will usually attract only minimal interest/ earnings – and will most likely be retained in the form of Cash (including in appropriate circumstances, term deposits of suitable duration).

Recurring surplus cashflow

Whilst this may form part of the savings account initially, once an investment has commenced there may be opportunity to direct the recurring surplus cashflow directly into the investment portfolio: this may be on irregular, frequent or as little as annual deposits. An example of this use of recurring additional funds was described in this article, originally focused on self-funded retirees but applicable to other circumstances as well.

A savings plan may be the initial destination for such surplus, but to ensure that a sound investment strategy can be implemented from this source, the preparation of (and adherence to) a personal budget will be most useful.

Bequests, gifts or other ‘windfall gains’

From time to time some of us are fortunate enough to beneficially gain from the goodwill of family members, employers and other sources in the form of a gift or estate bequest – in a lump sum that should be considered as a potential start of/ addition to an investment portfolio. Windfall gains such as ‘winnings’ should also be considered in this context.

Proceeds of sale of assets

Where assets are sold and the proceeds from the sale are surplus to other needs (such as acquiring a replacement asset; debt reduction; or satisfying another high priority goal), the lump sum should be treated like the item immediately above – a lump sum available for investing.

Various forms of borrowing (debt)

Debt-funding, or borrowing to invest, is a common way of ensuring that an investment portfolio is sustained. Readers will be familiar with acquiring property using such a transaction: paying a deposit and the acquisition on-costs, then completing the purchase with funds raised under a mortgage. With an investment other than direct property, debt-funding can also be utilised – and because the capital sums involved may not be as substantial, a more manageable process will likely be available.

Borrowing for investment purposes is often referred to as ‘gearing’: some of the common avenues available for such funding include (in no particular order of significance) –

  • Borrowing secured against a property (e.g., home equity loan);
  • Personal loan;
  • Credit card;
  • Margin loan; and
  • ‘Vendor’ finance.

Caution needs to be exercised when gearing investments. The structure of the borrowings, as well as of the investment/ portfolio need to be considered in the development of the strategic plan for the investing – and criteria relevant to loan servicing and fall-back options clearly planned.

Sourcing advice on investing

The experienced advisers at Continuum Financial Planners Pty Ltd are available to assist you with your planning around sourcing funds to invest: ‘we listen, we understand; and we have solutions’ – and when it comes to undertaking an investment program we can advise you about a strategy that will target the achievement of your financial needs, goals and objectives. To arrange a meeting with one of our advisers, call our office (07-34213456), or use the Contact Us facility on our website – you will receive prompt and courteous attention to your request.

(This post was originally published on this website in April 2015: it has been occasionally refreshed/ updated, most recently in December 2020.)