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

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.