We talk about how inflation affects our living costs and planning for FI.
We discuss the real purpose of building a portfolio of assets, and the best investment strategies to fund 50+ years of financial independence!
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Good discussion again guys!
Something that rarely seems to get brought up by people who were paying or receiving high interest rates in the 80s is that inflation was also much higher back then. The gap between interest and inflation was also higher, but it’s not as though people were paying 15% interest on their mortgage with inflation at 2%, they were paying 15% but with inflation of 10% so a gap of 5% vs a gap of say 1% or less today. And with their wages inflating by roughly that amount as well within a very short period of time the amount they were paying on their mortgage quickly became a lot more affordable, as well as seeing the value of their house go up quite considerably not only on an absolute basis but also on a relative basis as house prices shot up.
On the issue of trusts, I think it really depends on your circumstances. If you’re both on roughly the same amount of money and similar tax rates and in full time work, probably not. But if one of you is in a much higher tax bracket, or one will be taking time off work for kids etc, or you work in a field where you have to worry about being sued and want it for asset protection (any medical practitioner, maybe lawyers etc) then a trust can make a lot more sense. We looked into setting one up but ultimately decided not to because of the risk that future governments will shut down some of the tax advantages, but it’s still going to potentially make sense for some people at least.
Great comment mate. And yes, good point! Should’ve spelled that out properly on high cash rates. On the mortgage side, I’m not sure if people were all that thrilled about it at the time given the uncertainty of increasing rates/inflation making ppl worry how far it would go? The current environment is more stable in terms of wages, inflation and rates… not that ppl are necessarily happy about that either 😉
That’s the thing with structures – there’s no certainty around future legislation taking the benefits away. But totally makes sense for asset protection, tho that is a fairly small amount of people in percentage terms. And as I said on the pod, the tax optimisation fetish can easily become the main goal in itself and turns into a cat and mouse game where the goal is to beat the government/ATO. You’re probably aware that many people put the cart before the horse in this respect and isn’t very healthy lol 🙂
Hi Dave,
Been a big fan of your blogs the last few years.
I’ve been thinking lately about how to pay off my mortgage faster by using my home loan equity to borrow about 100K to invest in dividend shares.
I’m thinking with my low variable interest rate under 3%, and the dividend of approximately 4% (after tax and franking credits) from LICs, I would already be ahead.
I have 100K in offset so I could debt recycle by paying off this loan and redrawing it and claiming the >3% interest rate as a tax deduction.
I also figured with the current situation with the world, this would be a good time to buy some LICs.
I know you can’t give financial advice but what do you think of my plan and do you have missed anything?
Thank you
Hey Hunter. First, just to be clear, you cannot ‘claim’ the 3% as a straight tax deduction, it is offset against your investment income first. For tax purposes, you’d be earning say 6% in gross dividends (including franking) and paying 3% interest, so you’d be earning say $3k of positive income which is taxable. After tax maybe you’re $2k ahead in cashflow terms, plus growth.
I wrote more about debt recycling here in case you missed it. Is $2k per year a great benefit that will help pay off your mortgage faster? No, not really. Not saying it’s a bad idea, but it’s hardly a game changer. You could probably make/save more than that without taking extra risk and keeping your situation simple.
Thanks for the sensible advice 🙂
I have read your debt recycling post and that’s how I also calculated the same 2k return.
Initially, I also wondered if the return was worth risking 100k. However, with the current economy presenting a good buying entry point, I could load up on some AFIC/ARGO and even reinvest the dividends. We can currently afford to pay the extra repayment without assistance from the dividends. Plus with franking credits and tax credits, I see it as medium risk at most.
If I was a betting man (I’m not), I would think that 100k will return more than 3% per year for the next 20-30 years.
Perhaps I could borrow a smaller amount like 50k to lower the risk.