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Strategies To Consider If You Have Surplus Cash, Savings, Or Equity In Your Home

Written by Aaron Alston

I have outlined in this article 3 commons strategies available to help accelerate your wealth creation journey.

Salary sacrificing into superannuation

Salary sacrificing into super is a great way to boost your retirement savings by utilising pre-tax dollars and therefore reducing your taxable income.

Example

John (55) works Full Time and has a salary package of $100 000 p/a plus 10.5% super.  He is looking for ways to reduce his taxable income whilst increasing his wealth as he approaches retirement.  He currently has a paid off home and roughly $600 000 in super.  After consulting a financial adviser, they implement a strategy whereby John salary sacrifices up to his concessional contributions cap of $27 500 each year until he turns 60.

If John does nothing

Net super contributions over 5 years – $10 500 x 5 years less 15% contribution tax = $44 625

John’s salary before salary sacrificing

Gross Income $100 000

Tax – $24 967

Net Income – $75 033

If John salary sacrifices up to his concessional contributions cap

Net super contributions over 5 years – $27,500 x 5 years less 15% contributions tax = $116 875

John’s salary after sacrificing

Gross Income – $83 000

Tax – $19 102

Net Income – $63,898

Source – https://paycalculator.com.au/

Outcome – Although John is salary sacrificing an additional $17 000 p/a, he only reduces his take home pay by $11 135 p/a.  John will increase his super savings by an additional $72 250 over 5 years.

Establish a share portfolio

Example

John has $100 000 cash that he is looking to better utilise.  He has been thinking about investing into the share market for a while but doesn’t know where to start so he decides to engage a financial adviser.  John is however concerned about the volality of the market.  After understanding John’s financial situation and needs and objectives, the adviser recommends John initially invest $30 000, however dollar cost average into the market by making regular contributions of $1,500 p/m.  The adviser explains that John can cease the ongoing contributions at any time, however, to maximise the earnings potential of the investment long term, he stays the course.  The adviser also says to John that as he feels more comfortable with the strategy, he can also invest more as he wishes.  Dollar cost averaging is illustrated below.

Outcome – By dollar cost averaging into the market, John has protected himself from the volatility of the market whilst also giving himself every chance of making greater investments returns than cash over the longer term.

Invest into residential property

Example

John owns a $1 000 000 property with $200 000 owing.  He has healthy surplus cashflow of $25 000 p/a with approximately $100 000 in savings.  He would prefer to keep his savings buffer for emergency purposes, however on the other hand he would also like to grow his wealth.  The good news is he can do both.  See below.

  • Home Value $1 million v $200 000 owing (The bank will allow you to borrow up to 80% of the value of the property without paying additional Lenders Mortgage Insurance or LMI). John can borrow up to $800 000 without being penalised.
  • John engages a finance broker and has been pre-approved to purchase an investment property up to $600 000. John decides he will use the available equity in his home.
  • John purchases an investment property for $600K. To avoid paying LMI on the new purchase, John requires $145 000 to complete (20% deposit plus $25K costs)
  • He utilises the available equity on his home loan securing the deposit plus costs against the home. He now has two loans (his original $200 000 plus $145 000 for deposit and costs) – John’s broker splits these two loans for tax purposes
  • John then borrows the remaining $480 000 (80% of $600 000 from the bank) secured against the investment property without paying LMI.

Outcome – John now has a new investment property and was not only able to retain his $100 000 for emergency purpose, but he also avoided paying LMI on his own home and the investment property.  John sets aside $15,000 from $25 000 p/a cashflow for extra interest repayment and expenses as the property is negatively geared by $5 000 p/a.

Invest into a combination of the above

When it comes to investing, you don’t have to pick one or the other.  You may only be able to salary sacrifice $5,000 p/a, or perhaps you desire property over shares or vice versa or even better yet, you want to diversify your investments and implement all 3 strategies.  Dipping your toes in the water and doing something is still better than doing nothing.

Summary

  • If you have surplus cash, savings or equity in your home, investing may be the right time for you.
  • Either salary sacrificing into super, investing to shares or property can kickstart you accelerate your wealth creation journey.
  • Speak to a financial adviser who can help determine which investment vehicle may be most appropriate for your individual circumstances.

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