INVESTMENTS

Consider the following example in which you have $80,000 to invest.



Option 1: would be to put this money in the bank - say a term deposit - or a superannuation scheme (in this example, we assume a return of 4% p.a.).

Money in the bank:

NOW1 YEAR5 YEARS10 YEARS
80,00083,200
97,332118,419




Option 2: would be to invest in the share market (in this example, we assume a return of 15% p.a. compounded).

Money in the share market:

NOW1 YEAR5 YEARS10 YEARS
80,000
92,000
160,908
323,644

 



Option 3: would be to use your $80,000 to purchase an investment property valued at $600,000 by borrowing an additional $520,000 from the bank (in this example, we assume a return of 8% p.a.).

Money in an investment property:

NOW1 YEAR5 YEARS10 YEARS
600,000648,000881,596
1,295,354
- (520,000)
- (520,000)- (520,000)- (520,000)
80,000128,000
361,596775,354

 







What's happening in this example is that rather than getting an 8% return on your $80,000, you are enjoying an 8% return on $600,000. So after one year, you have equity of $128,000, in year five $361,596 and in year 10 $775,354.

So as you can see, even if we assumed that shares had a return of almost twice that of property, the ability to leverage your money has meant that while you've achieved a lower return you've actually gained equity of more than double Option 2.

The important point to note is that you must ensure you invest in assets that out-perform inflation and are in a growth environment. There are benefits and downsides to all investment options, you just need to be aware of what they are and make an informed decision as to which is best for you. Your accountant or financial adviser will be able to assist you with this.