Debt recycling is the process of replacing mortgage debt, or bad debt, with investment debt, which is known as good debt. 

This strategy enables investors to start building wealth while they’re still paying off their home. As equity is built up in their home, funds are re-drawn and invested. Income from these investments can be used to further reduce the mortgage balance, while the growth component contributes to wealth accumulation.

This is how debt recycling worked for one couple.

Mark and Jane have built up considerable equity in their home, and upon advice from their financial planner decided to make that equity work harder for them. The couple currently owes $240,000 on their home, which is valued at $400,000. Their licensed planner recommends Mark and Jane implement a debt recycling strategy, refinancing their current loan to give them a $300,000 loan limit. This releases $60,000 of available equity for investment.  

Mark and Jane’s planner recommends they invest their $60,000 equity into a portfolio of managed investments specifically chosen for income potential. After one year, their portfolio has grown in value to $65,000, and yielded an income of $4,000 which is used to reduce their mortgage further. After regular loan repayments, their mortgage balance is $230,000 after the first year. The couple then draw the extra $10,000 in equity to make an additional contribution to their investment portfolio. This process is repeated each year until their mortgage is extinguished.

Debt recycling can benefit investors prepared to invest not just funds, but also time and patience. To learn if it would be appropriate for you, contact your licensed financial planner.

To discuss debt recycling in action call (02) 4926 2300 or email us. 

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Every parent wants the best for their child, so if you are in a position to invest money specifically for your children’s future, you should follow the same approach as if you were investing personally.

Start with clearly identifying why you are investing, set a goal and put the strategy into place. A range of products is available depending on your attitude to investing and the investment time frame. For short-term goals, a high interest earning savings fund may be appropriate and for medium to long-term goals, managed funds and direct shares could be suitable. For longer term goals, a geared instalment program may be appropriate.

One taxing question is in whose name to hold the investment. Children are taxed at penalty rates on unearned income. They can receive income of up to $416 in 2014/15. For example, an investment of $5,942 earning 7% pa this financial year would be tax-free if held in the child’s name.

Other options to avoid the high rates of tax include:

• Investment bonds where income is reinvested and the life office pays tax at 30%. The proceeds of the bond are tax-free after 10 years and the child can be named as the beneficiary.
• Investing in the name of the parent on the lowest marginal tax rate. A parent who has no other income could earn around $140,000 in fully franked dividends and pay no tax. A parent already earning $30,000 could earn around $45,000 in fully franked dividends and pay no extra tax, before medicare levy.
• Investing using an ‘implied trust’ where the investment is held in the parents’ name in trust for the child. The child enjoys the tax-free threshold of $6,000 and the parents keep control. Beware that the investment must be used for the benefit of the child or the Tax Office can attribute the income to the parents and tax them personally.

There are plenty of options, so talk to your financial adviser about an appropriate solution for your situation and that of your children.
Call (02) 4926 2300 or email us.

Source: www.ato.gov.au 

Disclaimer

To discuss Tax and your children's investments please do not hesitate to contact the team at Leenane Templeton.

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One of the principles of successful investing and building wealth is to make regular contributions – in this way, you buy when asset prices are low and you also buy when they are high. You don’t have to agonise over when to invest and, on average, your buying price will be lower over the long term.

This is called “dollar cost averaging” and many investors unknowingly benefit from it.

But before you can invest you first need to have saved some money to invest! It’s easy to get started.

Step 1

Many of us fall into the trap of paying everyone else first and then we get what’s left over. This not only diminishes our self-worth, but more often than not, there’s not much left over when everything else has been paid which can also be depressing.

Step one in establishing a regular savings plan is to pay you first. Even if it’s only 10% of what you receive… it’s yours (and you’re the one who’s worked hard for it!). Then you can focus on paying everyone else.

Step 2

Open a separate bank account to place that 10%. Online savings accounts offer better interest rates, low or no fees and they are easy to set up and maintain. Establish a regular automatic transfer from your everyday account so you don’t miss the money. And leave it there to build.

Step 3

While you are saving, start looking for opportunities to invest your money to earn a higher return. One option when starting out is to invest in a managed fund. Managed funds pool your savings with thousands of other investors, giving “small” investors access to a wide range of quality investments, managed on your behalf. These funds allow you to start investing with as little as $1000 which is built upon with monthly instalments that can be automatically transferred from your savings account.

This is where we come to the “science” of dollar cost averaging. By investing the same amount every month your contributions are purchasing units on a regular basis, irrespective of the current market price. Over time, the power of regular purchasing has shown that investments are bought at lower average prices, giving you more units for the same outlay, which again compound as you reinvest the returns.

Investing doesn’t diminish the importance of regular saving – after all you can’t invest money if you don’t save it first! Stop procrastinating and start building your wealth today.

Our team of award winning financial planners are available to discuss how saving and building wealth will open up many opportunities for you and help secure your future.
Call (02) 4926 2300 or email us.

Disclaimer

If saving, building wealth and investing are areas in which you would like more information, please do not hesitate to call the expert team at Leenane Templeton.

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Compounding isn’t a new concept – many of us will remember studying it back in our school days. Legendary scientist Albert Einstein famously called it ‘the most powerful force in the universe’, while American business magnate John D Rockefeller suggested compounding is the ‘eighth wonder of the world’.

These might sound like bold claims, but the power of compounding on an investment portfolio should certainly not be underestimated.

What is compounding?

In simple terms, compounding is the process whereby returns made on an investment are reinvested in order to generate subsequent returns of their own.

The concept of compounding is best illustrated using an example. Twins Annie and Vanessa both allocated $10,000 to the same interest-bearing investment on their 25th birthday. For simplicity, let’s assume the investment pays interest of 5% per year.

Annie reinvests all of her interest every year, while Vanessa banks the $500 each year and spends it on everyday living expenses. Let’s see how their investments had fared by their 45th birthdays.

Vanessa earned $500 interest each and every year for the 20 year period – a total of $10,000. Of course she still had her original $10,000 investment as well.

Annie, on the other hand, saw her investment grow to more than $26,000 by reinvesting her interest. The additional $6,000 she earned over and above Vanessa highlights the power of compounding. You can see from the table that Annie’s investment is now earning her $1,263 per year, while Vanessa’s investment is still earning her only $500. This differential would continue to grow over time if the sisters remained invested. 

Make compounding work even harder for you

The power of compounding can be magnified if you make small regular contributions to your investment. Let’s look at another example to highlight the concept.

Brothers Jim, Dan and Tom all decided to invest $10,000 in the same managed fund for 10 years. Over that time the fund returned an average of 8% pa.

Happy with his original investment decision, Jim did not make any additional contributions. Dan, the wiser brother, understood the effects of compounding and made additional regular savings of $100 per month. Tom – the wisest of them all – worked out he could afford to save an extra $200 per month and made sure he always contributed that amount to his investment. The difference in their investment returns over 10 years is startling:

Of course the example is a stylised one. It ignores potential fluctuations in investment returns over the period, which would affect the three outcomes in reality.

These examples highlight how compounding and contributing regularly to an investment can have a major influence on investment performance. The long-term performance impact of compounding can be significant and must not be overlooked by investors. Perhaps Einstein and Rockefeller were right, after all.

Source: Colonial First State, May 2014

Disclaimer

Speak to one of our expert financial planners to see how you could be compounding and contributing regularly to your investment.
Call (02) 4926 2300 or email us.

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Compounding can be the road to riches and anyone can do it. All you need is perseverance to stay on the savings path and the intelligence to understand what is happening. Basically, compounding is earning interest on your interest. The more money you accumulate the larger the return each year.

Sadly there are two catches. First, it involves sacrifice – you can’t spend it and still save it. And second, it sounds boring – at least it is until the money starts pouring in and then it becomes downright fascinating!

Let’s look at an example.

David started a savings program at age 17 and starting with a $100 deposit. He puts away $1,500 each year for 13 years into a fund that earned 7% a year. From age 30 he didn’t add any more to his savings fund. By that time the balance of his fund was $30,450.

David’s twin sister Jenny was having too much fun at 17 spending every dollar she earned so she delayed her savings program until she reached age 30 – just when David stopped. Starting with $100 Jenny deposited $1,500 per year and maintained that amount every year until she reached age 65. Her fund also averaged 7% p.a. At age 65 Jenny ended up with $208,423. Amazingly through the power of compounding, David, who hadn’t added anything to his fund for the last 35 years has $325,123 in his account that's over $116,000 more! The 13 years that David saved were worth more than all of the 35 years that Jenny saved.

You’re probably asking, “Where would someone under 20 find $1,500?” We have a suggestion. If your adult child is working – even for a few dollars a week – they will probably qualify for the federal government’s co-contribution scheme. As well as teaching your children about compounding, you could gift them a $1,000 superannuation contribution and the government would add another $500 to their account. You could invest $1,000 over 13 years and your child could end up with more than $325,000 at age 65 (based on an average return of 7% per annum).

This suggestion applies to superannuation which they won’t be able to access until later in life, however, the principle is the same if the money is invested outside super.

There are some aggressive investment strategies available for young people who are not as risk conscious. Contact our licensed financial advisors if you are interested in finding out more.

Sources: Australian Tax Office website www.ato.gov.au Super co-contributions. Compund interest calculator – MoneySmart website www.moneysmart.gov.au

Disclaimer

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According to James Dunn of The Australian newspaper, whilst volatility has always existed in the sharemarket, it has never been as confronting to investors as it has been during the past two years. In fact, for much of the past three years Australian investors have lived with volatility well above levels previously considered normal.

This market’s downside has, according to investment advisor Jamie Nemtsas, caused many investors to reassess their reliance on the sharemarket and much of the money now held in term deposits, a doubling since September 2007 to $200 billion, has been from those fleeing the sharemarket, whether totally or partially.

Mark Thomas of van Eyk Research, whilst supporting active investment managers comments that a real return of 3% – 4% pa should be regarded as an attractive investment every day of the week, and this is what term deposits offer – with zero risk thanks to government guarantee. He states that whilst this is on offer it makes absolute sense to advocate term deposits as good investments.

Research house Zenith Investment Partners considers that globally, due to a more severe downturn, developed world governments will be heavy bond issuers as they attempt to borrow to fund the numerous fiscal packages they have initiated as responses to the global financial crisis. It indicates that the Australian Federal government issuance is expected to reach more than $300 billion by 2013, up from about $55 – $60 billion in 2008.

Historically, government securities have produced lower yields than corporate ones, so reduced income will be a factor for investors (and for Governments if increased aged pension funding is required).

It is important for investors to regularly reassess their appetite for risk and not just wait for market fluctuations. Volatility is not necessarily an ideal definition of risk, it is simply a measure of variance in the prices of a stock or returns from an index over a period of time. Whilst the active versus passive debate has focussed on equities, investors also need to consider their fixed interest portfolios. However Mohamed El-Erian of PIMCO considers the risks are high for passive bond investors and that the levels of government debt and currency investment risk demonstrate the importance of actively managed fixed income exposure. Perpetual’s Richard Brandweiner says that fixed income assets should provide certainty and predictability, but unfortunately. In the last two years many fixed income investments proved to be lacking in defensive characteristics.

By 2016 analysts indicate that 30% of our superannuation assets will be owned by people relying on those assets as their primary source of income. With retirees increasing and living longer there is a constant view that a high proportion of their assets should be in growth, however not everyone is convinced that holding a relatively high allocation in growth assets in retirement is a good plan. PIMCO’s John Wilson argues that people should hold their age in bonds, and others support this view indicating that the downside of investing in equities for people who are unable to sustain large drops in their wealth should invest in annuity products which provide a guaranteed income stream over a defined period of time. However, these products can be costly.

The importance of maintaining strategic asset allocations applies at all levels and as it can be difficult to understand the risks and the market conditions in which they perform well and those in which they don’t.

At the end of the day, everyone is an individual, people are different and have differing needs and objectives. Whilst there are mechanical ways of measurement in investments, there is nothing mechanical about investing or investors. There is no one-size fits-all. So the bottom line is to seek professional advice from your investment advisor. Andrew Frith at The Self-Managed Super Specialists is here to actively assist you make the best decisions for your needs.  

PLEASE READ DISCLAIMER

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