Investing surplus cash to build wealth
After all your hard work there will be a time when your business comes of age and starts to build wealth. Now you can actually bank some of your profits and use the excess funds to invest for both the future of your business and your own financial future.
It’s great that you’re wondering what to do with surplus cash. This is a good position to be in, but now you’ll need to make some decisions about where to move your money.
There are many different ways to invest and the solution you choose will depend on your individual situation. Some of the things to consider include:
These are some of the factors that may inform your investment strategy, which in turn will influence the types and mix of assets you invest in. In addition, you’ll need to consider risk and return, liquidity and tax implications – which are touched on later.
Even for experienced investors it’s a good idea to consult with a financial planner and choose your business investment strategy carefully. Most people have a mixture of short-term (1-3 years), medium-term (3-5 years) and long-term goals (5+ years), which all require different investment solutions and considerations.
Some of the most common types of investments used by Australians are shares, property, bonds and cash. These are all called assets.
Your investment strategy will determine which of these asset classes you include in your portfolio, and how much of your budget you assign to each. There are also products such as managed funds and wrap platforms, which offer convenience, control and flexibility with your investments.
All investment involves risk, but diversification could be a way of managing the risk associated with investing. It involves spreading your money across different asset classes and investments, so as to limit the impact of negative events on any individual sector.
Diversifying across asset classes could help protect you against underperformance in any one of them. Your asset allocation will reflect how cautious or aggressive your investment strategy is.
The reason we invest is to seek a return on our money. However, as we have established, investing comes with risk. Choosing your investment strategy should involve research and deciding how much risk you are comfortable with and what kind of return you would like to achieve.
Investment in the stock market can be risky but may turn out to be very favourable. Investment in a fixed term deposit provides a guaranteed return, but a potentially modest one in some market conditions.
This refers to the ability to convert an investment to cash. The ease and speed of access to your investments will vary by asset classes and individual products, so it’s important to factor this in when you put together your investment strategy.
Also, be aware of any fees that might be incurred when you exit your investment.
Benefitting from investments will have tax implications, some of which may be complex. For example, if you are investing in shares you can be liable for tax in two ways:
With these complexities in mind, it’s important to get sound financial advice about your investment costs and liabilities before you choose an investment solution.
Your superannuation is possibly one of the biggest investments you will have. Putting extra money in as a salary sacrifice, as well as from after-tax income (non-concessional contributions), will grow your retirement funds. There are limits to respect here, so speak to your adviser to choose the best strategy for you.
And if you have a family business you might want to consider a family trust structure. Trusts are quite complex, and you’ll need to talk to an accountant and lawyer to ensure yours is established properly.
How much you choose to invest will depend on your own personal circumstances and investment strategy. The important thing is that you only invest the amount of money you can actually spare – which is why it could be a good idea to put together an investment budget and stick to it.
Again, it’s good to talk to a financial adviser to cover areas such as tax considerations, fees and exit costs before you commit to any investments.
Some types of investments carry lower risk than others.
As we’ve said, business term deposits1 can be a low risk investment option. You can put your money away for terms of between one month to five years and the interest rate is fixed. One disadvantage of investing money in a business term deposit is that the funds are locked away until the deposit matures. While in some circumstances you may be able to your money before the term ends, your interest rate will be affected, and you may be required to pay a fee.
With terms available that are as short as a month, term deposits could be a good way of setting aside money for GST and other taxes.
If you’re happy to accept a variable interest rate, you may also wish to consider a business cash reserve account1. Compare the rates between this and a term deposit to help you decide if the rate difference is worth the access.
Our Farm Management Deposit1 (FMD) account gives eligible primary producers access to Government concessions and ways to manage risk. The FMD scheme is designed to smooth out the highs and lows of seasons and cycles that agribusinesses face.
FMDs work like term deposits, offering fixed interest rates over a choice of terms. Deposits are potentially tax deductible provided certain conditions are met, but withdrawals become assessable to the extent deductions are claimed.
This webinar is produced by the Davidson Institute, Westpac's home of free financial education resources, building confidence today for a better financial future.
1. Westpac’s products are subject to terms, conditions, fees and charges; and certain criteria may apply. Before making a decision, read the disclosure documents for your selected product or service, including the Product Disclosure Statement and T&Cs for Westpac business term deposits, business cash reserve accounts and Farm Management Deposits; and consider if the product is right for you.
The information in this article is general in nature; does not take your objectives, financial situation or needs into account; and does not constitute financial or taxation advice. Consider its appropriateness to these factors; and we recommend you seek independent professional advice about your specific circumstances before making any decisions.