Financial Planning
Building your investments –
through gearing
Most of us have heard of gearing, or negative gearing.
Fundamentally, it’s just borrowing money to invest,
whether it is in a property, a share portfolio or any
other investment.
Gearing is a very useful strategy for those of us who
can readily pay off a loan, but find it much more difficult
to save money for investment.
Let’s say you’ve just repaid a loan and don't
really need the money you were using for repayments. It’s
all too easy for those funds to be wasted in unnecessary
spending. Instead you could take out a new loan for say
$15,000 which you use to buy an investment portfolio of
managed funds or direct shares, after seeking advice from
a financial planner.
The income from the investments and your loan repayments
will in time pay off the loan. You then re-borrow and
repeat the process with a second portfolio, but this time
you have income from two portfolios as well as your loan
repayment to reduce the loan, so it is paid off faster.
Over time, you could own a healthy investment portfolio.
When you negatively gear, the interest and other costs
payable on your loan are greater than your investment
income, requiring additional cash to make up the difference.
This amount is normally tax deductible against other income,
such as salary.
So gearing can build your portfolio faster, by multiplying
the return you would get if you just used your own money.
Be aware, however, that to come out ahead your total return
from investment income and net capital gains (after tax)
must be greater than the net cost of borrowing (including
tax benefits).
Police Credit Union makes available unsecured loans for
the purpose of gearing your investments. You should however
make yourself aware of the critical factors which may
affect your decision to gear - and take professional advice
from a financial planner.
Call your nearest Police Credit Union branch to arrange
a free, no-obligation meeting with a Bridges Financial
Planner to discuss how you can build your portfolio through
gearing.
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