For many Aussies, owning their first home feels totally out of reach – especially when it comes to putting together a deposit. Doing so can take many years of discipline, budgeting and sacrifice. If you’re a future home buyer on that journey yourself, you might be wondering whether saving or investing is the better route for accumulating a down payment. It’s a question asked by many in the long-term investing community, so we thought we’d help you find the right answer for yourself.
Saving or investing?
Spoiler alert: There’s no perfect solution for everyone. Instead, several factors can determine whether saving or investing is the best option for your situation. (Or if you could comfortably do both.)
To help you figure out what might work for you, ask yourself these seven questions.
1. When do you want to buy a home?
First, consider your time horizon – i.e. when you’re hoping to buy your first property. Depending on if it’s a short to medium-term goal or a long-term one, each option may be more suited to your timeline.
Let’s say you want to secure your first home in the next few years. Saving could make more sense, simply because it’s more stable and liquid, and less risky, than investing. You might opt to put your money into a high-interest savings account or term deposit.
If you’ve got many years ahead of you – like a decade or more – you may prefer to invest. This is because share investing has the potential for high returns, but it can take several years for these returns to materialise, therefore making this a more volatile option. Share investing is also a bigger risk, so you’ll need ample time to weather the natural ebbs and flows of the market. Even then, be mindful that a market downturn could strike at the exact moment you plan to sell your shares. If you don't have the luxury of waiting until the market recovers, this could pose a major obstacle.
2. What are the potential returns?
Returns can vary widely. As far as savings go, they're largely based on what kind of account you go for, which financial institution you choose, and current interest rates. If you’re investing, returns are mostly impacted by what you invest in and how the market performs.
But to give you an idea of what both options could look like, we’ll look at the average rate of return for each.
Savings accounts traditionally don’t deliver huge returns, with the best rates typically around 4-5%. But this can differ depending on what interest rates you're receiving. If they’re higher, many banks will adjust their savings interest rates, possibly translating to greater returns.
Share investing generally has the potential for better returns, historically averaging around 6-9% per year. However, these returns can also fluctuate significantly. What's more, to see significant growth, you’d ideally want to hold your shares for the long haul. This is because the market has historically grown over the long term. Plus, you need a long-enough timeframe for compound interest to work its magic.
Remember: share markets can be volatile and there’s no guarantee of returns. Plus, while it can be used as a gauge, past performance doesn’t always indicate future performance.
3. What’s your risk tolerance?
It’s also important to work out your risk tolerance . This refers to how comfortable you are taking risks to achieve your financial goals.
Generally speaking, saving is the safest of the two options, making it attractive to those with a conservative risk tolerance. It comes with very little risk because your money is protected by a government guarantee.
Under the Financial Claims Scheme (FCS), the Aussie government backs any of your deposits up to a total of $250,000 per account per institution (be it a bank, building society or credit union). This means if anything were to happen to your money, you’d still be able to recoup it.
If you’re more aggressive when it comes to risk, you might prefer to invest. While it does have the potential for higher long-term returns, investing is inherently riskier. There’s no guarantee it’ll grow (or even that you’ll make your money back).
There is a broad spectrum of investment options that contain different levels of risk. Like index-based exchange-traded funds ( ETFs) or blue chips compared to high-growth shares, for example. But, you’ll have to accept the fact that any money you put into the stock market could lose value.
4. How much can you commit to your home deposit at regular intervals?
Whether you save or invest, both options require an element of discipline. To build your wealth, you’ll likely need to continually top up your capital regularly – perhaps at the same cycle as your paycheck, monthly or every few months. Automating your investing or savings deposits can help with this.
Weigh up your budget and see how much you can commit to your home deposit each month. If it’s a fairly low amount, research the different fees associated with investing to ensure they don’t eat away at your money. Consider brokerage fees, as well as expense ratios/management fees if you’re investing in ETFs and/or managed funds .
Savings accounts and term deposits come with fees, too. The former may have account fees, withdrawal fees and other costs. The latter can have early withdrawal fees and a few other possible expenses.
It's also worth researching the various interest rates that savings accounts offer, and whether there are any requirements you need to meet to access a higher interest account. Often this can include a deposit amount, number of transactions, or other requirements to qualify for a high-interest savings account.
If you choose to invest, you can use Pearler’s Investing Frequency Calculator to figure out your ideal investing intervals that balance contributions and fees.
While you’re at it, you can also use our Investing Amount Calculator to estimate how much to invest to help you reach your home deposit goal.
5. What are the tax implications of saving versus investing?
It’s easy to forget about tax implications, but remember that both options come with them.
If you earn interest on your savings, it’s considered income. This means you’ll need to declare it at tax time , where it gets added to your other income sources and taxed at your marginal tax rate. For high-income earners who have a higher marginal tax rate, this can be a disadvantage. A big portion of interest earnings could be taxed, thus reducing the overall benefit of any savings.
Investing also comes with a number of tax implications. The main one is capital gain tax (CGT), which you’ll need to pay if you sell your shares and make a profit. If you hold your shares for longer than 12 months (which you likely will if you’re a long-term investor ), you could nab a 50% CGT discount. However, everyone's tax situation is unique, and you should speak to a tax accountant if you have any doubts. For now, you can learn more about CGT in our guide to how capital gains are taxed .
Dividends and distributions from shares and ETFs , as well as any interest gained on bonds , are also subject to tax. Like interest on your savings, these are treated as income and taxed at your marginal tax rate. If some of your dividends have franking credits attached, you may be able to reduce your tax liability. Taxes can be complex, so again, reach out to a tax accountant for guidance.
On the subject of taxes, you might want to check out our guide to the First Home Super Saver (FHSS) scheme . The scheme may offer a more tax-friendly approach to saving for your first home.
6. How does inflation factor in?
Inflation impacts your purchasing power, so you’ll need to factor it in if you plan to buy real estate in the future. Whether you’re hoping to buy in three years or 10, the money you have today may not be the money you have tomorrow. In fact, if $50,000 were to stand still for, say, five years, its real value would be closer to $44,000 with an average inflation rate of 2.5%.
Because savings interest rates are typically low, your money may not really grow once you consider inflation. Sometimes savings accounts offer rates just above inflation, meaning your gains would be fairly minimal. Or, they might even sit below inflation. If that happened, the value of your money would effectively decrease.
Due to its historical average growth rate of 6-9%, investing has the potential to outpace inflation . This could mean that your purchasing power stays much the same over a long period or possibly even gets a boost.
However, this is assuming your money grows. As we’ve cautioned several times already, investing does come with a degree of risk – including the chance of losing your funds if you end up selling at a loss.
7. Can you do both?
Quite possibly. There’s absolutely nothing wrong with creating a home deposit strategy that combines the benefits of both.
Investing and saving at the same time can help diversify your strategy . You could balance the relative security of savings with the growth potential of share investing, letting your nest egg act as a safety net that you can fall back on if need be.
It can also allow for more flexibility because you can adjust your plans based on market activity. If your shares are performing well, you might choose to invest. And if they’re showing more volatility, you could lean into your savings.
You just need to ensure you can budget for both and stay on the ball while maintaining each strategy. This means keeping a close eye on how your money is moving and possibly adjusting your strategy if you have to. Don’t hesitate to reach out to a licensed financial adviser if you’re unsure of your next move.
The bottom line? Think about whether one or the other, or both, would work for your financial goals, personal circumstances, risk tolerance and timeline. No matter which direction you choose to go in, ensure it aligns with your long-term goal of becoming a home owner.
Happy investing (or saving!)
