KNOW YOUR ENEMIES

The twin enemies of wealth creation – whether you are investing $5000 or $100,000 – are taxes and inflation.

Tax takes a particularly harsh toll on securities that pay interest, since everything you receive each year is taxed at your marginal rate.

In contrast, capital growth investments benefit from the fact that only half of your gain is taxed, although this concession applies only if you hold the investment for at least 12 months.

Those who borrow to invest usually also enjoy the benefit of being able to get a tax deduction on the net cost of the borrowings, including interest and related charges.

The other important issue to consider is inflation. From the perspective of a geared investor this can be a significant boon since it means the real cost of repaying your loan falls each year.

On the other hand, investors need to remember that turning $5000 into $50,000 will deliver less than it seems since inflation will have reduced its purchasing power. Unfortunately, this does mean that the longer you take to reach your $50,000 goal the less it is worth.