12. Never pay interest … except investments4. Grow your pie Cash flow from labourCash flow from investments
13. 3 Advanced graduate strategy Graduate from uni on salary of $40k+ Save $5,000 into savings account as “savings buffer” Then save extra $5,000 and invest it in managed fund that invests in shares and start a regular savings plan into fund After managed fund has built to $20,000 Apply for “margin loan” for an extra $10,000 with your existing managed fund units as “collateral” for the loan (33% LVR) Apply to “capitalise” the interest which means that the interest on the margin loan will be added to the loan each month Invest margin loan into managed fund = $30,000 invested Keep adding savings to managed fund and maintain margin loan at 33% of total amount invested (LVR = 33%)
14. 4 Remember to claim the interest on your margin loan as a tax deduction each year (effectively reducing the cost of that interest by your marginal tax rate of 31.5%) Continue building your managed fund savings to $67,000 + margin loan of $33,000 = $100,000 invested Buy $300,000 unit or townhouse to live in Receive First Home Owners grant Apply for parent guarantee so no deposit required Repayments ~ -$26,000 p.a. Rent out one room +$8,000 p.a. (net $18,000 p.a.)
15. 5 You will be able to save less now that you have a mortgage … but you will also be receiving about 5% distributions and tax benefits from geared managed fund (~$5000 per year) … net home loan repayments ~ $13,000 (26,000 – 8,000 – 5,000) Continue adding savings to managed fund As managed fund goes up (and down) in value over time, so will the proportion that you own (value – loan = your bit) With more experience, higher income and higher cash buffer, consider increasing your LVR to 50% by buying more units in the managed fund using the margin loan.
16. 6 Build up managed fund portfolio to $300,000 (you own $150k + margin loan of $150k). The time this takes depends on how the sharemarket performs, your income and how well you can save! Probably about 5-8 years 5% distributions and tax benefits now = $15,000 Home loan repayments (per year): $26,000 in loan repayments Less $8,000 or more in rent Less $15,000 in managed fund and tax benefits Net repayment = $3000 per year ($57 per week)
17. 7 Now you will be on a higher salary at work and have much lower “net” mortgage payments and so you can now choose one of the following (or a combination): Make extra repayments into your mortgage and pay it off completely within 5 years, and/or Make extra savings into your managed fund (and also increase the associated margin loan to keep borrowing rate at 50%) and go for “financial independence”, and/or Consider upgrading your property to buy a 4 bedroom house in Sydney for family reasons, and/or Improving your lifestyle … buying a new car, go on a few nicer holidays, renovate your property …