I often get the question: What is gearing? It’s one of the big catch words of the industry and it is essential to understand if you’re wanting to be a successful investor.
Gearing refers to leveraging your position in the financial market to maximise the effectiveness of your investment. That is, using tax effective borrowing to invest in shares or property.
You’ve probably heard of negative gearing, where the income of an investment, for example a house, is less than the cost of owning and managing the investment. This is a common tax effective investment for Melbourne and Sydney investors.
What you probably don’t know about gearing is that you don’t have to be ready to invest in property to take advantage of the benefits.
A regular geared savings plan can be for the younger investors, those just starting out or wanting to reach an important savings goal, such as a house deposit. It can also suit people who a more established, wanting to diversify their property investments. This kind of leverage takes your current savings and in invest two or even three times the amount in the market.
It’s important to discuss with your Financial Planner to find out if this is the right investment for you.
Rachael, 31, has $10,000 in cash that she has saved towards her first home. At the moment, she is able to add $500 a month to her savings. Rachael is worried that, at this rate, it could take more than ten years to save enough money for a deposit.
Rachael would like to own her own home before she turns 40, but wants to avoid costly mortgage lenders insurance on her home loan. She visits a Financial Planner to discuss how she can make the most of her savings plan and save $100,000 before entering the property market.
Rachael’s Melbourne-based Financial Planner draws up a regular geared savings plan to help her reach her $100,000 goal in just seven years. Rachael invests $10,000 in equities that have been carefully selected by her Financial Planner, an investment loan is organised and she also borrows and invests $10,000 at an assumed rate of 5.80%. Each month, Rachael contributes $500 to the investment and borrows $1,000. She also pays the small amount of interest on the loan, but leaves the principal untouched.
Through this, Rachael is leveraging her position in the market to maximise her investment. Tax deductions can be considered on the interest she pays, to make this a tax effective investment.
At the end of seven years, Rachael can cash in on her investment, paying back the loan in full and taking $100,000 in cash to put towards her first home.
Could a regular geared savings plan help you reach your own goals? It’s important to discuss your situation with a Financial Planner to find out what is best for you.
Phillip Richards is a qualified Melbourne-based Financial Advisor with more than seven years’ experience serving clients in Melbourne and Sydney. His expertise in investment, debt management, retirement planning and insurance will help you assess your options to build your wealth. Contact Phillip today to discuss how you can build your own wealth and plan to reach your goals.
This information is general in nature and does not take your personal situation into account. If you are interested in taking control of your wealth, contact Endorphin Wealth Management.