First up, we have a big announcement to make…

We are stepping out from behind the mic and onto the pages of " How to Not Work Forever .” Yes, we wrote a book, and we’re very excited about it! Mark your calendars for 26 June, and maybe consider pre-ordering. It's a big deal for us, and your support shows bookstores that good reads don’t go unnoticed.

Now, back to our topic this week, we’re trying a more personalised way to receive and answer questions from the community. So, this time around, we’ve been asked by our listener Ben: “should I save for a home deposit or invest in ETFs (Exchange-Traded Funds) ?”

Here’s the full story:

”Hi, my name's Ben. I'm a house painter from the South West of Western Australia. I'm 29 years old, and have about 20 grand in the bank. And my question to you guys is: would it be more beneficial for me to start heavily investing in ETFs now – obviously starting as early as possible to benefit off the compound interest? Or, should I start saving money in a high-interest savings account for a first home deposit?”

Things to consider when deciding between investing or saving for a house

First off, major props to Ben! Saving that kind of cash is a massive win, and if you're there, you've already nailed the hard part. So, let’s unpack what comes next: to save up for a house or invest in ETFs instead? Before we even start comparing the two, there’s a checklist any potential homebuyer would benefit from working through.

1. Personal goals and priorities

To start with, it’s all about zooming in on what makes your heart beat faster when you think about your financial future. Are you itching to plant roots and paint your own walls? Or does the flexibility of not being tied down to a mortgage sound more your speed?

If it’s a home with your name on the deed within five years, then saving $20,000 annually, for example, is where the rubber meets the road. But, remember, your goals need to snugly fit into the reality of your budget without stretching it until it snaps.

2. What type of property: PPoR (Primary Place of Residence) or IP (Investment Property)?

Now, if your heart is set on buying, consider what you're diving into. Is it going to be your forever home, or are you eyeing it as an investment? Each has its own set of rules to play by, not to mention the potential perks (depending on some conditions).

Tash, for instance, snagged the First Home Owner Grant by opting for a shiny new apartment in Perth that had never felt the warmth of living feet. A bit of homework can open doors you didn't even know existed.

3. Time horizon

How soon do you want to turn the key in your own front door? If it's within a blink – say, five to seven years – a savings account might be your best bet to avoid market volatility. However, if you're in no rush and can play the long game, ETFs could offer more attractive growth potential for your savings. Well…assuming you're prepared to weather the downturns along the way.

4. Risk tolerance

Speaking of market downturns, how does your stomach handle them? While ETFs could potentially gain high returns, they also come with a bigger risk, especially if the economy is under pressure. Can you weather a dip if it coincides with your home-buying plans? This is where your plan for managing that risk comes into sharp focus.

5. Interest rates

Next, a bit of maths halfway through our checklist. Comparing the interest rates of savings accounts against the expected returns of ETFs can offer a clearer picture. While the average return on share investing might hover around 7%, historical trends in markets like the S&P 500 suggest it could be higher. Yet, don't forget the tax office's cut on the interest earned from savings, which can nibble away at your returns. It’s also important to always remember that past performance is no crystal ball for future returns.

6. Liquidity needs

In simple terms, liquidity is how quickly you can turn your investments into cash. A savings account shines in this area, offering you quick access to your funds. In contrast, ETFs might involve a bit more rigmarole with selling times and tax implications.

7. Financial stability and emergency fund

Then there's the question of having enough in your emergency fund. If 2020 taught us anything, it's that surprises aren't always pleasant. Before dreaming of ETF dividends or doorbells, make sure you have a separate emergency fund to ride out any crises or unexpected expenses.

8. Investment knowledge

At the risk of sounding cliche…knowledge is power, especially when it’s about investing. It's not the wisest move to take investment tips from your Uber driver. Or, to chase the latest crypto craze because someone's brother's girlfriend's cousin said so. Dive deep, research, and know what you're getting into. If an investment sounds too good to be true, it probably is.

9. Homeownership cost

If saving for a home deposit is on your mind, consider the full picture of homeownership costs. Beyond the mortgage, there’s a laundry list of expenses – maintenance, taxes, rising strata fees, and more. These costs can transform your dream home into a financial burden if you don’t plan for them. Remember, while renting caps your maximum spend, owning a home only sets the floor for your expenses.

10. Diversification

And if investing is your call, diversifying your investment portfolio is your best defence against the unpredictable market. It's the art of not putting all your eggs in one basket. Or, in this case, not sinking all your funds into a single asset class like property.

This is not to scare you, but we've seen from the past that home equity is not safe from a troubled housing market. While something like New Zealand’s recent housing crisis happening here is unlikely, it's not an impossible scenario either.

However, if property is your passion, consider spreading the risk through a Real Estate Investment Trust (REIT) . Rather than banking everything on a single home, REITs offer a way to invest your money across multiple properties. Convenience is its thing too, as you can directly purchase REITs on the sharemarket (for Aussies, that’s the Australian Securities Exchange).

Four ways to save up for a home

Before we dive in, here's a little heads-up: the insights we're about to share are based on our personal experiences. In other words, you should see them as anecdotes rather than professional advice. Ultimately, we only guide you through the options we know, but leave the route down to your own sense of direction.

If you’re in the same exact situation as our listener Ben, the options below could add to your own research. However, we know life's journey varies for everyone – what works for one might not for another. So, as you read on, consider your timeline, risk tolerance, and where you find yourself standing today.

1. High-interest savings account

For those eyeing a home purchase in the near future, a high-interest savings account is a solid starting point. It's like the comfy couch of financial options – easily accessible and reliable. You know your money's there, ready when you need it, especially if a home in the near future is calling your name.

The thing about high-interest savings accounts is that – despite the name – they often struggle to outpace inflation. This means your money might not go as far tomorrow as it does today. It's the classic trade-off between risk and reward, leaning heavily towards minimising the former at the cost of potentially higher gains.

2. Invest in ETFs (Exchange-Traded Funds)

In contrast, ETFs present an opportunity for higher returns, especially for those with a longer timeline before purchasing a home. The risk is spread across various assets, unlike the comparatively higher-stakes investing in individual shares.

However, market risks spares no one…and there's a chance that the value of your investment could dip, especially in the short term. With that said, saving your home deposit through ETFs is an option – but ONLY IF you have a more extended timeline (think five to seven years or more).

3. Hybrid approach

Can’t decide? Maybe you don’t have to. A hybrid approach – splitting the funds between savings and ETFs – might offer a balanced ratio for both safety and growth.

It's worth remembering, though, that this approach doesn't entirely remove risk. The investment portion is still subject to market volatility. And there are tax considerations for both the interest earned from savings and potential capital gains from selling ETFs. (For more on this, check out one of our past episodes: “What happens when I’m ready to sell?” )

4. First Home Super Saver Scheme

Finally, the First Home Super Saver Scheme stands out as a forward-thinking option. It’s a government initiative that helps you save money for your first home inside your superannuation . FHSS is known for tax advantages and potential earnings that could increase your savings for a home deposit.

However, it's not without its rules – your funds are somewhat locked away until you’re ready to buy your house. So, accessing them for purposes other than buying your first home can be complicated to say the least. Then there’s the possibility of your contributions dropping in value during market fluctuations. And, lastly, future legislative changes to superannuation could impact your plans too. (We’re planning a future episode exploring these things, so stay tuned!)

Send us your questions!

Beyond Ben's specific scenario, we’re sensing some of you might be casting glances towards a second property. Chances are, you’re thinking of turning that into an investment – a whole different kettle of fish compared to getting a property for residence. We're definitely bookmarking this topic for some future episodes.

In the meantime, a big shoutout to Ben for sparking this conversation. Keep sending those voice questions our way so we can do a deep dive on the confusing parts of saving and investing. When you do, throw in a bit of backstory so that we can really talk through it.

Before we wrap up, a gentle nudge: rate and share this podcast if you haven't already. And for those who've been with us through thick and thin, pre-ordering our book is one more way of supporting the mission of this podcast.

Happy investing!

Tash & Ana