20160203 - Invest for the Future

The ‘great Australian dream’ usually involves buying a home using borrowed money and then paying this loan off as quickly as possible. The earlier a mortgage can be cleared, the more equity the owner holds, which can be a significant aspect of a smart financial plan; but there are numerous other factors that must be taken into consideration when planning your financial future.

The best time to start is?

Many people wait until the mortgage on the family home is paid off before looking to invest elsewhere. The downside of this approach is that it prevents them from profiting from an important investment strategy – compounding growth. While they eventually find themselves ‘debt-free’, the time left available to invest in growth assets is not enough to gain the full benefit.

In short, it is possible to generate more wealth by investing in other assets whilst ALSO paying off the home mortgage.

Investment returns

Depending on the asset, most investments deliver two types of returns – capital growth and income:

  1. Income-based investments generally offer income and no chance of capital growth, so your income in real terms will be eroded by inflation.
  2. Investing for capital growth has the advantage that the return on your money is more likely to keep up with, and preferably exceed, inflation.

The decision to plan for income, growth, or a combination of the two, normally stems from your tax position, your immediate requirements for income to cover living and other expenses, and your longer-term plans.

What about debt?

Traditional ‘geared’ portfolios rely heavily on capital gains due to investment income generally being a lot less than the cost of the debt. This places enormous pressure on the investment portfolio to perform, even over the short term. It also means that unless you can afford to hold the investment for a relatively long period, while meeting your cash flow shortfall, you are vulnerable to poor investment performance.

A better way

A better approach is to first seek professional financial planning advice and if appropriate for you, construct an efficient geared investment portfolio that will generate capital growth over the long term and sufficient income to meet your current expenses.

By doing this, you produce a positive cash flow, with a primary focus on the reduction of personal debt and expanding your overall wealth.

Once you have a positive cash flow, you are better able to increase your net position (assets minus liabilities) by accelerating your investment program and exposure to long-term growth assets.

If you’d like more information or would like to know if this might be appropriate for you, please feel free to contact us for a confidential chat.


This information provided is of a general nature only and should not be taken as constituting professional advice from Profusion Planning.