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INVESTMENT MADE EASY
Nick Roberts
The other day I was asked one of those perennial questions by a prospective client:
"I have a large mortgage, a personal loan and surplus income of $200 per month. Should I invest the surplus or repay debt early?"
For the majority of us, the answer is unequivocal - repay debt. There are two reasons why:
- Risk. With debt repayment, there is no investment risk, you will be in a better position to cope with sickness etc and also have the ability to borrow more later should the need arise.
- The interest costs on debt are almost always higher than the after-tax and charges rate of return from investments. There are some useful tables around showing the break-even gross returns before charges depending upon your tax & interest rates but as an example, if you're on 33% tax and your mortgage rate is 9% the break-even gross return required is 13.4%. Sorted says that on medium-risk investments we should expect an average return before charges of 8.2%. Whoops?
Of course, as always in life, there are exceptions:
- Emergency cash fund
- Greater but more risky investment returns are available e.g. business or investment property
- Tax-deductible interest
- Inflexible borrowings
- Employer subsidised superannuation scheme
- The government subsidies on Kiwi-saver
Investment decisions and saving for retirement are one of the trickiest issues we face and it's no wonder that people put off doing anything. A well-off friend of mine commented the other day that he wished he was on the national average wage so that when he retired he could actually live on NZ Super. What he meant was that he could then cope with the target level for NZ Super "65 at 65" i.e. a net 65% of the net national average wage at age 65 and buy more espresso's now!
If you have any tax or business queries of any kind telephone 0800 ASK NICK, e-mail nick@abac.co.nz or use "Contact Us" on www.abac.co.nz. The information in this article is of a general nature and should not be relied upon as a substitute for specific advice.