Everyone likes ice cream right? Do you feel the same about debt?
There is good debt and there is not-so-good debt.
The not-so-good debt is the one that has a high interest rate and is not tax deductible. Examples of no-so-good debt includes credit card interest, personal loans and car loans. Too often I see clients with great cash reserves sitting in their bank earning 2% interest and they still have a car loan there costing them 12%-15% interest for the next 5 years. It makes no sense to me.
If you have the cash sitting in the bank then pay off your credit cards in full each month so you don't get stung with interest. If you still have spare cash and a non-deductible car loan then pay out your car loan.
And finally, if you have a home loan then consider setting up an offset account and dropping your remaining spare cash in there. This will offset the interest on your home loan and effectively give you much better returns than the 2% you are earning in a term deposit.
I also see people with home loans with interest rates way up over 5% when they could refinance and get a rate closer to 3.7%. A $500,000 loan at 5% refinanced this way would save $6,500 per year in interest. Or a whopping $65,000 over 10 years!
Get on top of your no-so-good debt and you will be able to eat a lot more ice cream!
Please share this with anyone you know that would like to get on top of their debt faster.
A common question by Australian investors seeking advice is whether they should invest in property or shares. According to the 2017 Russell Long-Term Investing Report, residential property has done extremely well over the past few years, fueled by historically low interest rates. Australian shares have a big tax-advantage through the franking of dividends. If you had the choice, which would be the best investment?
The answer is, if you can, diversify and invest in both.
Why? Diversification is the key to removing volatility from an investment portfolio and having all your eggs in one basket is opening yourself up to more risk.
Investopedia defines diversification as "A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique contends that a portfolio constructed of different kinds of investments will, on average, yield higher returns and pose a lower risk than any individual investment found within the portfolio."
The 2017 Russell Long Term Investment Report lists Australian residential property and Australian shares as the top two for averaged returns over the past 20 year year period. Both asset classes have done well over the long term and both are good growth classes.
The Russell report shows that Australian property has done especially well over the past few years due to the low interest rate climate. Borrowing for residential property investment has been relatively easy and households have been able to take on more debt. However, if interest rates climb over the coming economic period then the great growth in residential property values that we have been experiencing will dry up very quickly.
Australian shares may be due for a resurgence, especially if the economy picks up and investors start to shift their sights away from property. Australian shares also provide the benefit of franking credits, where company tax paid is passed on through to Australian investors, provided a tax-efficient boost to earnings.
Don't stop at Australian shares either. The ASX represents around 2% of the global economy so picking up some international shares via an exchange-traded fund (ETF) will also diversify your share portfolio significantly.
So if you have the option to invest in both Australian property and shares then do it. If you only have property then be sure to consider diversifying to shares. More diversification in your portfolio is a good thing since it will help reduce the volatility of returns.
Identification for each applicant
Proof of earnings for each applicant
Deposit and other loans evidence
Purchase price (not required for pre-approvals)
For refinancing only