David Koch explains what to do with your first decent windfall. Picture: Adam Taylor
David Koch explains what to do with your first decent windfall. Picture: Adam Taylor

Four ways to change your life with $10,000

YOU'VE sacrificed nights out with friends, you've worked hard on your side-hustle, maybe received a share of an inheritance or nice bonus at work … but now you have $10,000 and you want it to work hard.

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What you do with an amount like this could change your life. The problem is a lot of people just waste it thinking it's not large enough to make a difference.

Wrong.

Here are four ways to make that $10,000 change your life forever.

1. Start a share portfolio

With fees as low as $9.90 a trade, starting your own share portfolio can easily be achieved with as little at $10,000 and could mean a stake in five stocks.

Having said that, direct share investment needs a level of expertise and interest in the stock market. If you're not that interested, a better way to invest in the sharemarket is through a managed fund or ETF. These give you diversity and the benefit of a portfolio professionally managed by investment experts.

Look at ETF's that follow Australian stocks as well as international stocks in Asia, Europe and the US.

But direct share investing can be profitable, fun and interesting.

Bell Direct investment guru, Julie Lee, has some great advice for novice share investors.

"For the first two years of my investing journey, I kept a diary writing down why I bought a stock and why I sold a stock," she advises. "For example, I like stocks that are growing their earnings strongly and the share price is also moving upwards."

"My exit is if the company starts seeing slower growth and/or if share price falls more than 20 per cent from its peak."

Take that $10,000 and make it grow. Illustration: John Tiedemann.
Take that $10,000 and make it grow. Illustration: John Tiedemann.

Stocks that I like for a first portfolio at the moment include companies like:

Afterpay Touch Group, which has developed a payments platform used across retail, the car industry and a range of other sectors;

Xero Ltd, which provides a cloud based accounting platform for small businesses to run their books. It's the major competitor of other accounting platforms like MYOB, Sage and Quickbooks;

and Kogan.com Ltd; the online retailer.

"These are all stocks that are growing strongly but still have substantial potential to grow," says Julia. "The flip side is that if the market falls strongly or there is an external shock to the market, these are the stocks that will be hardest hit."

We also tapped into the thought of Elio D'Amato from Lincoln Indicators on his advice for a first time share portfolio.

"Rather than adopt a 'hit-and-hope' or 'dart board' approach to investing, we prefer investors focus on Financially Healthy small businesses generating strong proven earnings growth with operation tailwinds that support continued growth into the future."

He likes:

Appen Limited - a language, search and social technology company;

Wisetech Global Ltd - developer and designer of cloud-based logistics platforms;

Praemium LTD - is transforming the way financial advisers manage their clients;

The Citadel Group Ltd - an IT security software provider.

"Investors could also consider emerging income stocks that have a good growth angle to support them like Rural Funds (RFF), which is involved in holding agricultural land and Folkstone (FET) and Arena (ARF) who hold childcare properties," says Elio. "They do not manage the properties, which removes a lot of the business risk."

"Portfolio neglect is a real capital killer and while we would like to think we could buy a stock and put it in the bottom drawer, too much can happen to a business to be exposed to that risk. If you don't feel you have the time, discipline or patience to proactively manage a portfolio, then perhaps a managed solution such as a Fund or ETF would be preferred."

2. A guaranteed 15 per cent return

That should get your attention when term deposits and savings account interest rates are only about 3 per cent.

It's not as sexy as a new car, but paying down debt is one of the smartest things you can do with some of that extra cash.

David Koch looks at long term options to turn $10,000 into lasting wealth. Picture: Adam Taylor
David Koch looks at long term options to turn $10,000 into lasting wealth. Picture: Adam Taylor

For example, paying off a chunk of the mortgage early can save tens of thousands of dollars in interest payments over the life of the loan.

And while Australia seems to have an enduring love affair with credit cards, they're racking up interest at over 17 per cent, so it makes no sense to leave it sitting there.

Debt is a drain on income and the sooner the slate is wiped clean the sooner you can start putting your money to work.

3. Think long term and let compounding work its magic

Locking your windfall away in long term investments, like superannuation, is the key to building long term wealth. It's always hard to contemplate locking away spare cash until retirement, but it is still a terrific investment ... just make sure you understand the new rules and get good advice.

Here's a little example why.

If you were to invest $2000 each year from age 19-25 at an average return of 10 per cent (5 per cent interest plus 5 per cent growth) and stop investing at age 26, you will have invested $14,000 in total.

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At age 65 that nest egg will have grown to $930,641, or 66 times what you put in. That's the magic of compounding, or earning a return on a return every year.

4. Get on the property bandwagon

Last week we talked about "fractional" investing in property as a way of getting a foot on the bandwagon but there are other options as well.

Just as there are managed funds for investing in shares, both domestically and overseas, there are similar funds for property ... both listed on the sharemarket and unlisted. Talk to an adviser or broker for their recommendations because there are so many to choose from.