Many people defer introducing any financial rigour into their lives believing it will restrict their spending plans, however under effective management it can have the opposite effect.
Spending decisions are much simpler when you’ve established goals and there is evidence that having control of your financial life can substantially improve your standard of living.
Your personal mortgage is a good example:
The average mortgage can last up to 30 years and can cost more in interest than the purchase price of the house. If you had a $400,000 mortgage and interest rates averaged 6%, over this time the total interest you would pay would be an astonishing $479,416. This is money that you could have better used to create wealth if you were able to repay your home loan sooner. Imagine if you had the capacity and could embrace a disciplined strategy to repay this amount in only ten to eleven-and-a-half years. Then the total interest paid would only be $156,649. That could be a saving of $322,767.*
(*Property Investment Analayst – Pro Series 2014)
The benefits of repaying your mortgage much earlier than the original term flow through your whole financial life. Interest you would have paid on your mortgage can now be put to other forms of wealth creation and also allow for some life changing decisions.
What is the PTP strategy?
We look to use the equity in your home to start building wealth sooner. Initially, the investments are placed into a professionally managed basket of Australian Shares either via Separately Managed Accounts (SMAs) or Managed Funds. Shares, while arguably no riskier than property, can be more volatile as they are priced daily. A basket of shares dampens the risk of any share significantly impacting on the strategy and we further mitigate this risk by using a number of professional managers. Australian Shares have been our preference as historically they have paid higher levels of tax effective income which can be an important advantage in this strategy and their liquidity means we can sell a portion of the investment when we can see gains.
The income generated from dividends can then be used to reduce your home loan. Your taxation situation can also dictate whether we pro-actively realise any capital gains to reduce your home loan even more rapidly.
As the mortgage reduces we can then look to use the accumulating equity to invest additional amounts into growth assets. Non-Tax deductible debt (‘Bad’ Debt) becomes Tax-deductable debt (‘Good’ Debt) but we also focus on reducing your total debt position. The level of debt you are comfortable with is very important and as the equity increases in your home you may look to more substantial investments, such as investment properties as an alternative to shares. They do reduce the flexibility of the strategy but their very high levels of leverage have made them very popular with many Australians.
It is important to note that we do not utilise and would never recommend using traditional margin lending products or ‘internally geared’ investments within this strategy.
Why do we use Australian Shares?
The average return for Australian Shares from 1994-2013 (20 years) has been 10.43%. The best year was 37.03% and the worst was –38.44%*. We want to allow the strategy long enough to achieve the long run average. There will be positive and negative years but by buying shares every month we can actually take advantage of this volatility using ‘Dollar Cost Averaging’**.
Additionally Australian Shares have historically paid higher levels of tax effective income than their international counterparts which is an important driver for this strategy. This income can be directed onto your home loan and the ‘franking credits’** included in this income will help reduce the effects of any possible taxation. Historicall this income is surprisingly consistent and its growth has neutralised the impacts of inflation.
Lastly, the professionally managed Australian share funds we use are liquid. We can see the values each day and buy and sell based on that value within 24 hours. If we want to sell the portion which is the gain, we do not need to sell the whole asset, as you would if you we were holding an investment property.
The ‘Passport to Prosperity’ process.
- Initial cashflow assessment
- Start investment & reduce Mortgage
- Ongoing monitoring to eliminate ‘Bad Debt’
- Accumulate excess cashflow into investments & reinvest Income
- Asset alternatives such as Investment Properties
- Reduction of total debt using all sources of income and any gains
- Commence the transition into Superannuation
- ‘Make work optional’ by letting your wealth provide your income
- Nurture, grow and protect your retirement portfolio
- Management and transitioning of your Estate