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Why understanding compound interest is so important

compound interest

I was telling my son about the miracle of compound interest but he responded that you cannot use it any more because interest rates are so low. He showed me a clipping that read “daily compound interest on your savings account might net you a few cents, but not much more. Daily compounding makes only a minimal difference in how much you ultimately save.” I would appreciate your comments. Are there any investments that you could make to maximise compounding?

An understanding of compound interest is essential for anybody who wants to become financially secure.

We tend to use the term compounding because that more accurately describes the way it works. It simply means that the return on an investment is left to grow, instead of being withdrawn and spent.

The two classic investments to maximise compounding are real estate and shares. The returns from these assets, if chosen well, should consist of both growth and income. The only way to access that growth is to sell the asset.

Compounding works better with shares because the dividends generated by them can be reinvested in more shares, whereas with property the rental income would be insufficient to buy another property. However, real estate investors can have the best of both worlds by using the rental income from property to invest in shares.

The beauty of compounding is that it is slow to work its magic but the investment grows faster and faster as time passes, which is why starting early can make a huge difference.

The two factors that differentiate the amount of money you retire with, and how long your money will last after retirement, are the time and interest rate that are used via compounding.

We are elderly parents with our own Self-Managed Superannuation Fund. We do not receive an age pension. Our adult son earns a small annual income and has less than $75,000 in his super account. Are we allowed to gift him some money to top up his retirement savings?

A person can make gifts with no limit, as there is no gift duty.

However, if you are an age pensioner, any gifts in excess of $10,000 a year, or $30,000 in five years, would be treated as a deprived asset and, depending on your overall asset and income position, could affect pension eligibility.

You say you do not receive any pension, which means you could give to your son whatever you wish without any adverse effects on your finances.

I am 21 years old and have a dream to own a property. I want to start thinking about investing my money. I have worked out that, on my salary, I could probably afford repayments of about $1200 a month. I have looked at home loans but, with what I am earning, I cannot borrow enough money to afford anything in the property market. I have about $26,000 sitting in a high interest bank account but I am not sure what to do from here. What could I do to give me the best return on my money?

If you are prepared to take a long-term view – and would not panic and sell when the stockmarket has one of its normal bad days – you could consider taking out a margin loan to buy into a quality share trust.

You could start small and have your money spread over a range of shares in blue-chip companies. Also, you would receive a tax advantage, as part of the income stream generated by dividends from those companies would be franked.

You could then add to your base investment on a regular basis by reinvesting those dividends or by making further contributions.

If you first seek professional financial advice and adopt a conservative loan-to-valuation ratio, you should do well.

My wife and I are ready to upgrade our home. We have just $5000 remaining on our mortgage, with the home valued at about $900,000 and rental potential of $875 per week. I am unsure if we should sell our existing home to purchase the new home, or refinance the existing home and make it an investment property. What are the capital gains implications of the latter option?

If you keep your home and rent it out, the deductible interest would be limited to that payable on the existing mortgage.

You cannot increase the tax deductibility by mortgaging the original property to buy your new residence.

Once you leave the original property, you would be liable for Capital Gains Tax (CGT) on any increase in value from that date. However, it is possible to return to that property in the future and claim the six-year absence CGT exemption but, if you did this, the new property would be subject to CGT. This is because you cannot have two principal places of residence at the same time.

Your best course of action would to seek some advice and liaise closely with your accountant.

 

Article Source: www.brisbanetimes.com.au

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Opinion

You Should Check These 4 Things Before Buying a Used Car

Before Buying a Used Car

It is no secret that the Global Economy is in a bad shape with growth projected to slow down from 6.1% in 2021 to 3.6% in 2022 and 2023. From the COVID-19 pandemic to the war in Ukraine, coupled with rising food and fuel prices you have to ask yourself: Is it really a good time to buy a brand new car? I know you’ve worked hard and you deserve the best bang for your buck, however, buying used cars instead of new ones can be the solution!

First of all, those eye-catching lower price tags are the main benefit. But there is a catch to everything, you can’t buy used cars carelessly. You need to ensure that your money is invested into four wheels that will relieve your headaches, not give you one. You can follow the guidelines below to ensure that you are on the right track in your checklist.

1. The Exterior

You can’t judge a book by its cover, however, assessing the exterior can discover scratches, dents, or rust. Look out for cracks on the windshield, find out if the headlights need fixing and if the rear and side-view mirrors are working. You can also look at the wheels for dents and holes in the tires.

2. Under the Hood

The engine is one of the first things that you need to look at to ensure that it is working properly. It needs to be clean with no leaking fluid or gas. Depending on your location, some countries/ cities/ provinces require used cars to pass a safety and smog test. The wiring harnesses & looms are other critical things to look out for in order to ensure that the electrical circuit in your car is intact. A damaged electrical circuit can cause accidents; I’m sure you don’t want that.

3. Vehicle History Report

There’s a lot of information in a report that can help you decide if you really want a used car. This includes mileage, accidents, and service history. Some vehicles (Honda) can accumulate large mileage figures without experiencing much wear and tear, however, others do not. Accident history is important because it is better to stay away from vehicles that have been in major wrecks and require a new engine or a lot of bodywork.

4. Age

Most new cars can lose up to 60% of their value because of depreciation. This fact can be of great use to you when asking for lower selling prices because you can use the car’s age and how the make and model lose value over time as a negotiating point.

Before Buying a Used Car

Buying a car is quite a big deal for most people. Used cars have become quite an affordable and reliable solution. Buying a used car that is just 2-3 years old is a wise move as you can save quite a penny and still get a virtually new car. After reading this article you are now equipped with what you should look out for. Good luck with your used car journey!

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Opinion

6 Main Steps For Anyone Who Wants To Migrate To Australia

6 Main Steps To Migrate To Australia

Australia is one of the best countries in the world to live in. In addition to its strong economy, it has an amazing infrastructure as well as beautiful places to explore. All of the states provide a great lifestyle and a flourishing environment. Even though choosing to migrate to another country is difficult, Australia is worth it. 

To migrate successfully and comfortably, a number of things need to be taken into consideration. To be able to migrate with relative ease, you need to know step-by-step what the procedures are. There’s no doubt that it can be overwhelming to leave your country and try to settle elsewhere. Moreover, it can be hard to find the best approach and know the right procedures for immigration. In this article, we’ll look at 6 main steps for anyone who wants to immigrate to Australia.

1. Research Your Options

Research plays a vital role if you’re looking to move to another country. To ensure that you thrive there, you need to have knowledge about their culture and the way people live their life. You need to research everything and find out which state of the country would suit you the most. Although researching can be difficult and potentially tiring at times, it’s of great importance. There are plenty of states in Australia, and all of them have different costs of living. Find out which state would be beneficial for you and where you can have a good lifestyle. You will need a job to be able to stay and thrive there. Employment opportunities also differ according to different states, so it is important to include this factor in your research.   

2. Apply for a Visa

After you’ve researched thoroughly and you’ve decided which state you’d like to relocate to, it’s time to apply for a visa. The employment status and visa application go side by side. You can either get a job offer letter first and use that as a base to apply for the visa, or you can apply for the visa first and then look for employment afterwards. You’ll need to give the required information to the embassy to start this process. Usually, processing and approving a visa takes time. You can use this processing time to make some initial plans because moving to another country can be an overwhelming task.

3. Hire a Migration Agent

Moving to another country can be both physically and emotionally very challenging. If you have made up your mind to move, it’s imperative that you hire a migration agent. The process of migration to Australia can be tricky and it’s always helpful to have an agent by your side to guide you. Agents have up-to-date information and they’re well aware of the context in Australia. They offer the best advice and help with all sorts of legal problems and bureaucracy. Moreover, they’re experts at what they do so you’ll encounter few problems in your immigration process. Although they don’t guarantee that your visa will be approved,  they make the process much easier and smoother. 

4. Look for Employment

Most countries require specific reasons for immigration.  If you’re an employee in that country, the process becomes much easier. You need to know about the opportunities that might be available. Melbourne and Sydney are the two most beautiful cities in Australia. Finding a job there might be much more difficult. You can try looking for employment opportunities in Victoria. Job security plays a crucial role in getting a visa. Australia welcomes skilled professionals, so if you’re a skilled individual, it won’t take long before you find a job. A good way to do that is secure a position on Australia’s Priority Migration Skilled Occupation List. It’s a list of skilled individuals that Australia welcomes with open arms.

5. Look For a Home

Once you find a job in a good state and city, the next step would be to look for a suitable and affordable home. Living expenses vary from state to state but overall, Australia can be a bit expensive to live in. Find a home that is affordable for you and where you can easily pay its mortgage. Initially, you can even rent and once you settle in properly, start looking for affordable homes to buy. Try to find somewhere close to your workplace so it can make your life a bit easier.  

6. Plan Your Move and Hire a Moving Service

At this point, you’ve got a job and your visa has been approved. The next step is to immediately start planning your move. As mentioned earlier, preparing to move can be a hectic task and has many components. It demands a lot of time and can be tiring as well. You’ll need to pack all your essentials. After that, you’ll need to move your luggage to Australia. A good way to do that is to hire a moving service because they’re much more efficient and do things quickly. There are plenty of moving services, so you’ll have a variety of options. When everything is done and your visa has been approved, all you need to do is to get a plane ticket and be on your way to starting a new chapter in your life. 

6 Main Steps For Anyone Who Wants To Migrate To Australia

Moving to a new country to settle in and start a life can be scary. It’s a completely new chapter in your book. Even though it can be frightening to leave everything behind and immigrate to a new country, it has its perks. If you wish to immigrate to Australia, you’re going to have to go through a tough procedure. To be able to immigrate successfully, you need to research as much as you can about Australia and its states. Finding a job will be essential because the Australian government requires a reason from you to live there. After you get a job, things will get easier. All you need to do is head down to the embassy and apply for a visa. Once you have that, start packing and hire a mover to transport your luggage. Once everything is finalized, book a flight and say your farewells.

 

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Local Issues

It now takes more than a decade to save a home deposit

save a home deposit

Housing affordability has worsened by every measure since the start of the pandemic, according to new research, and is unlikely to improve as interest rates rise.

The time it takes to save for a home deposit has blown out to a record 11.4 years, while the national median dwelling now costs a record 8.5 times the median household income, the latest ANZ/CoreLogic Housing Affordability Report has found.

The share of household income needed to either pay rent or pay off a mortgage has also risen, the report, which measures affordability to the end of March, said.

It’s a bleak picture for long-term residents of regional Australia, who are facing a steeper jump in the ratio of house prices to incomes and a sharper deterioration in rental affordability than their city counterparts.

Despite early forecasts that the pandemic would send unemployment soaring and push property prices down, effective stimulus and ultra-low interest rates sparked a property boom. The shift to remote working also prompted a spate of sea-changers, putting pressure on regional housing markets.

“There’s been a broad-based deterioration in housing affordability over the past couple of years,” ANZ senior economist Felicity Emmett said.

“The deterioration in affordability has been much more marked in regional areas on average because we’ve seen prices and rents go up there generally at a faster rate.

“With the push to flexible working, capital city workers have been able to move to the regions. Often these are knowledge workers that are relatively highly paid, and so they’re able to afford to pay higher prices for homes or pay more for their rent.”

Nationally, the median dwelling value is 8.5 times the median household income, a record high and up from 6.8 since the pandemic. But across regional Australia, the ratio is 7.9 times, up from 5.9 pre-pandemic.

For someone earning the median capital city income and looking to tree-change into the median regional home, the ratio is only six times, making the move an attractive option for higher-income workers.

The house price boom has outstripped wages growth, so it takes longer to save a deposit on average.

For someone who could save 15 per cent of their income, it would now take a record 11.4 years to save a 20 per cent deposit for the median home. That’s an increase of 2.2 years since March 2020, the fastest gain in this metric ever.

Once a buyer manages to save a deposit, they will need to set aside a higher share of income to pay off their mortgage, with the portion of household income needed to service new mortgage repayments rising to 41.4 per cent, well below record levels but above the decade average of 36.5 per cent, and the third consecutive increase.

Potential buyers trying to save a deposit are also facing higher rents, with the share of income needed to service rent on a new lease lifting to 30.6 per cent, higher than two years earlier.

Rental affordability has worsened more in regional areas, where tenants need to spend 34 per cent of income on rents, compared to 28 per cent in capital cities.

Smaller capital cities also face more pressure on their rental markets, while in Sydney and Melbourne, the share of income needed to pay rent is still lower than in March 2020.

“What we’ve ended up with is a really challenging environment for the long-standing residents of these regional areas,” Emmett said.

She said many first-home buyers are getting help with their deposit from parents or grandparents, although hard data remains scant.

“It’s increasingly becoming the case that whether you’re able to buy a home and become a first-home owner increasingly depends on what sort of job your mum and dad had, and I suppose the question is – is that really, as a society, what we want?” she said.

She doubted housing affordability would improve much this year when rates rise, as mortgage repayments will be higher and property prices are not likely to fall enough to move the needle.

Damien Walker, mortgage broker at Atelier Wealth, said some first-home buyers are bridging the deposit gap by turning to lenders that offer loans with a low 15 per cent or 10 per cent deposit and no lenders’ mortgage insurance.

Others are getting help from parents in the form of cash gifts or guarantor loans, and some are using the federal government’s First Home Guarantee scheme.

He said it is important for first-time buyers using a small deposit to make sure they can make their repayments as the property market softens.

“If there is a small drop in the market, you will be at a higher loan to valuation ratio because you are already paying a small deposit,” he said.

Emma Greenhalgh, chief executive of housing peak body National Shelter, warned of the dire situation for renters.

“It is incredibly difficult for very low- and even moderate-income households,” she said.

“Every time there’s a housing crisis, people will say, ‘I’ve never seen it like this before’, but I think this truly is a case where services and organisations haven’t seen it like this, and I think the big difference is what’s occurring in the regions.

“People may have been making decisions to move to somewhere more affordable [in the past]. Those options aren’t available.”

She called for an increase in the Commonwealth Rent Assistance payment, as almost half of its recipients remain in housing stress, and for a national framework of tenancy legislations to offer consistency on dwelling standards, rent increases and no-grounds evictions.

Regional Australia Institute chief executive Liz Ritchie said regional residents had put off moving to cities over the past couple of years, adding to pressure on the rental supply as city dwellers arrived.

She called for greater commitments to social and affordable housing in regional areas for key workers, as well as more investment in diverse types of housing, such as apartments and townhouses.

“If we don’t have a barista, what sort of community do we have, [or] if we don’t have our key health workers?” she said.

“If you look at the monetary policy changes, people are hopeful that’s going to slow down some of that [price growth], but that remains to be seen.”

 

 

 

Article source: www.brisbanetimes.com.au

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