Mort­gage is zero, so now it’s time to in­vest

Money Magazine Australia - - THIS MONTH -

I’m a sin­gle 43-year-old earn­ing $60,000pa and have $38,000 left on my mort­gage. I have $40,000 avail­able in my re­draw ac­count, $115,000 in su­per but no in­vest­ments. I have been fo­cus­ing on pay­ing off my mort­gage but now feel I should be in­vest­ing to cre­ate some in­come for my fu­ture. I have been think­ing about buy­ing an in­vest­ment prop­erty but know lit­tle about in­vest­ing in prop­erty or shares. What would you sug­gest? Melissa

Paul’s ver­dict: Ei­ther top up su­per through salary sac­ri­fice or buy a prop­erty Keep up the sav­ings dis­ci­pline and ap­ply good old-fash­ioned com­mon sense

Con­grat­u­la­tions Melissa – a great job in get­ting your mort­gage down to zero. In fact, with a $38,000 mort­gage and $40,000 in your re­draw ac­count you are one of the few peo­ple I know with a pos­i­tive mort­gage. The bank owes you! You have also made a very good start to a re­ally good su­per bal­ance for when you stop work. I re­ally don’t think I need to ask if you do a bud­get. Clearly you man­age your cash flow care­fully to have achieved this out­come.

Sure, you may have won the lot­tery but I doubt it! I think that, like me, you would be fully aware that a big lot­tery win is about 12 mil­lion to 1. Mind you, en­ter­ing a lot­tery is a bril­liant way to do­nate ex­tra tax dol­lars to the govern­ment. How­ever, your words sug­gest some­one who runs their cash flow re­ally well. That, of course, is the key to suc­cess with money. It is quite ag­gra­vat­ingly sim­ple but too few of us do it. Just spend less than you earn and ap­ply the sur­plus to own­ing de­cent as­sets such as prop­erty and shares.

Now to your next step. You ac­tu­ally do know a fair bit more than you say. You have owned a prop­erty for a long time and I have lit­tle doubt that you have seen it grow in value. You also own shares through your su­per fund and you will have seen the ben­e­fits of that.

So let’s go with a pretty sim­ple but also pretty ef­fec­tive plan. First, why don’t you top up your su­per us­ing salary sac­ri­fice? On the top part of your in­come – the amount from $37,000 to $60,000 – you will be pay­ing around 35% tax, in­clud­ing the Medi­care levy. Any money you di­rect your em­ployer to put into su­per, up to $25,000 a year, is taxed at 15%. There is an in­stant 20% ben­e­fit to you. A dol­lar you earn in this tax bracket gives you about 65¢ to in­vest. The same dol­lar in su­per gives you 85¢ to in­vest.

Su­per is sim­ply a tax ve­hi­cle that in­vests in ar­eas such as prop­erty, shares, in­fra­struc­ture and in­ter­est-earn­ing in­vest­ments such as bonds. You can make de­ci­sions here by se­lect­ing growth, bal­anced or con­ser­va­tive type op­tions. At your age, it makes sense to go for a growth type option. You have decades for your su­per fund to grow in value, so short- to medium-term ups and downs are not re­ally a big deal. Do re­mem­ber that the $25,000 max­i­mum for tax-de­ductible con­tri­bu­tions in­cludes your boss’s com­pul­sory con­tri­bu­tions.

As you own a prop­erty al­ready and you should have share ex­po­sure in­side your su­per fund, I am quite am­biva­lent about whether you max out your su­per, buy an in­vest­ment prop­erty or do a bit of both. Su­per is a sim­ple choice due to the tax breaks and the sim­plic­ity. You ba­si­cally just need to keep an eye on how it is go­ing and en­sure you are in a good fund with low fees.

But a well-lo­cated in­vest­ment prop­erty is also a per­fectly sen­si­ble option. How­ever, there are some key rules.

First, take a close look at your bud­get and chat to a lender or two to work out your bor­row­ing ca­pac­ity. Then you need to plan around the bad stuff. How will it im­pact you if and when in­ter­est rates go up? Would you be OK if you could not find a ten­ant for a pe­riod of time? What would your rent be and, of course, the tax ben­e­fits to you from neg­a­tive gear­ing, which is any loss you may have after in­ter­est on your loan and costs of run­ning the prop­erty are de­ducted from the rent you get?

I would also want you to spend plenty of time look­ing at prop­er­ties in an area you know. Avoid prop­erty-sell­ing sem­i­nars like the plague. With prop­erty, you need to be your own re­searcher and make your own de­ci­sions.

Fi­nally, don’t take too much risk by over­bor­row­ing. You are in great fi­nan­cial shape; keep up your fi­nan­cial dis­ci­pline and ap­ply good old-fash­ioned com­mon sense to in­vest­ing.

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