How to increase wealth
Topping up your super is one way to improve your long-term financial position

Building wealth may seem an unattainable dream to many people. However, there is no secret to it and people can have wealth as their financial goal. It simply requires planning, perseverance and time.

Good financial advice can help you develop a sound investment strategy with the potential for optimal growth within your time frame.

The strategy mix depends on your particular circumstances. It might include any or all of these options:

Option 1 – Debt repayment (including your mortgage)

Paying off your debts, including your home mortgage, is an important strategy to build your future wealth. Repaying your mortgage faster allows you to save on your repayment interest.

Putting your money into an alternative investment usually means that you would first have to pay tax on the returns you receive. This means that the alternative investment would need to offer a return higher than the mortgage interest rate, after you have paid tax on the return, to put you in a better position.

When making the decision to pay off your mortgage faster there are a few things you can do, including:

• making extra payments;
• increasing your repayments;
• paying half your monthly repayments every fortnight (thus creating two extra repayments each year); and
• keeping your repayments at the same level even if interest rates fall.

Paying off your mortgage offers a good return at low risk. However, if this is your only strategy all your wealth building is dependent on the value of the one asset – your home. Therefore, it is important to consider some tax effective strategies to build your assets.

Option 2 – Topping up superannuation

Superannuation is generally a tax-effective investment structure. You pay a maximum of 15 per cent tax on superannuation earnings. Additionally, if you salary package additional contributions, they may be taxed at a rate lower than your marginal rate of tax – this could mean a saving of up to 32 per cent in tax payable.

Superannuation invested in a diversified portfolio may give you a better return than paying off your mortgage faster.

However, it is important to consider your time frame.

In the majority of cases superannuation is a long-term savings facility. Access to benefits is generally restricted as superannuation is intended to support you in retirement. That is why the government provides the tax advantages.

While investing in super is generally more attractive to those approaching retirement, it is important for younger people not to ignore super as an investment. Increasing your contributions above the government minimums can have a significant impact on your super balance when you eventually retire.

Option 3 – Borrowing to invest (gearing)

Gearing involves borrowing money to invest into growth investments (shares and property), that are expected to produce income.

A profit results when the investment return is greater than the costs of the borrowed funds. Negative gearing occurs when the interest cost for the borrowed funds is higher than the investment income received. As interest costs are generally tax deductible, the unused tax deduction can reduce tax payable on other income, such as salary.

Gearing can substantially increase returns over the longer term but it is also the investment option that carries the highest risk. Using borrowed funds magnifies both the potential returns and the potential losses.

There are a number of different methods for borrowing the money to invest. These include borrowing against the value of real estate (generally your own home), margin lending, installment gearing and using a personal loan plan.

• John Cunniffe is a representative of RetireInvest, a licensed dealer in securities and a registered life insurance broker.

.