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What If Investing First Gets You Debt-Free Sooner · My Accounting Advantage

• 0:03
  Speaker: Hello and welcome back to the podcast, My Accounting Advantage, featuring Mai Harris.
• 0:09
  Speaker: My name's Lee Woodward, the co-host, and she joins us again for another week of incredible knowledge.
• 0:15
  Speaker: Mai, welcome to the program.
• 0:17
  Speaker 1: Hi Lee, thank you.
• 0:18
  Speaker: Now, the last couple of weeks we've just really hit upon some topics that people never give them thought to and are now looking at a bucket company, first time they've had that in their life.
• 0:29
  Speaker: But today, very interested in this episode, why paying down your home loan isn't always the best return on investment, ROI.
• 0:39
  Speaker: Mai take is into it.
• 0:41
  Speaker: Okay.
• 0:43
  Speaker 1: So return on investment should be on everyone's mind when you actually spend money.
• 0:50
  Speaker 1: So for example, it comes around when, you know, even in the smallest thing, like paying for your meals, you're going out to dinner and you're paying a lot of money for, you know, good food.
• 1:05
  Speaker 1: So you're getting and you're always assessing whether or not you're getting a good meal for uh or a bang for your bucks.
• 1:12
  Speaker 1: So that is your return on investment.
• 1:15
  Speaker 1: So understanding that is quite important, especially when you want to invest your cash.
• 1:21
  Speaker 1: So where should you park your cash so that you can get the best return on investment?
• 1:29
  Speaker 1: And for example, you thinking about paying down your home loan or putting it into your offset account so that you can save on your interest on loan.
• 1:42
  Speaker 1: Well, that's great.
• 1:44
  Speaker 1: You know, a lot of people really dedicate themselves to do that.
• 1:47
  Speaker 1: But what you gotta think, how how much am I getting for the ROI on that cash?
• 1:55
  Speaker 1: So really you are saving 6% on um your home loan if you actually putting money into your offset account or you paying it down and that's it.
• 2:08
  Speaker 1: So you're gonna have to ask yourself if I actually spend that cash on an investment, will I get a better rate of return?
• 2:20
  Speaker 1: Am I getting more than six percent?
• 2:24
  Speaker 1: If the answer is yes, well, maybe you need to reconsider.
• 2:30
  Speaker 1: And also a lot of people don't even see tax savings, you know, on their income tax as a return on investment.
• 2:43
  Speaker 1: I encourage you actually reviewing that point.
• 2:47
  Speaker: It's so interesting.
• 2:48
  Speaker: There is super sacrifice where you can put money into there.
• 2:52
  Speaker: And we've discussed on the show before about having a self-managed super fund, depending on how much you've got.
• 2:58
  Speaker: But there's all these different ways, but I think people panic when it comes to their mortgage.
• 3:02
  Speaker: That's right.
• 3:03
  Speaker: Although we were just chatting off air, it's quite amazing in your world of accounts and my world of real estate that how big people still have a mortgage over the age of 40, and they do have to get that down because it's it's been like an ATM to them.
• 3:19
  Speaker 1: Yes, it's very scary to um, you know, have a big mortgage and also keep paying the interest, that goes up and down and you know, it becoming more expensive and cost of living also really take a big hit, you know, to your pocket as well.
• 3:35
  Speaker 1: So everything's all relevant.
• 3:37
  Speaker 1: But at the same time, if you actually were to look at your taxable income and how much tax that you pay, for example, your taxable income is $120,000 and your average tax is 25% on that income.
• 3:56
  Speaker 1: What if you have a spare $10,000 in that financial year?
• 4:02
  Speaker 1: You're thinking, oh, should I put this cash towards my home loan?
• 4:08
  Speaker 1: Or what should I do with it in order to get a better rate of return?
• 4:13
  Speaker 1: You can actually explore reducing your taxable income instead by making a super contribution.
• 4:20
  Speaker 1: What that means, you can claim tax deduction on that $10,000.
• 4:24
  Speaker 1: When that $10,000 get contributed to your super fund, your super fund actually pays tax at 15% on that money.
• 4:35
  Speaker 1: Okay?
• 4:35
  Speaker 1: So that's the lowest amount of tax that you can pay, 15%.
• 4:40
  Speaker 1: So what do you get in return?
• 4:42
  Speaker 1: You get a tax deduction for that $10,000, lowering your own taxable income, resulting in larger tax refund.
• 4:51
  Speaker 1: And when you compare your average tax on your individual income of $25, to the tax that your superfund paid of $15, you are really saving 10% tax overall, which means that $10,000 that you were going to put into your offset account, you're suddenly 10% in.
• 5:17
  Speaker 1: And you might save six.
• 5:20
  Speaker 1: So you are still better off by 4%, which is quite a lot.
• 5:24
  Speaker 1: That money that went into your super fund can be invested.
• 5:29
  Speaker 1: So that further your rate of return right there.
• 5:33
  Speaker: This is so interesting.
• 5:35
  Speaker: I think for our younger listeners of this program, and that could be the tradespeople, the the people working for the boss working for a company, they don't really give any thought to super because they think I'm I'm only young.
• 5:49
  Speaker: That's for old people.
• 5:50
  Speaker: And if everyone could just learn the importance of super early, because it it really is one of the best ways to having wealth later on in life.
• 6:00
  Speaker: And and that delayed moment isn't a delay.
• 6:04
  Speaker: You're chipping and chasing every day to build up your super.
• 6:06
  Speaker: And for those that have taken action and reached out to you and said, right, you can have four members of a self-managed super fund.
• 6:13
  Speaker: You can actually have five.
• 6:15
  Speaker: Can actually have five members.
• 6:17
  Speaker: So mum, dad, two kids with all this super, they could actually go out and buy a couple of investment properties, and that's the family trust.
• 6:25
  Speaker 1: Really is uh, you know, like you can help each other build wealth in that way.
• 6:31
  Speaker 1: You can actually move all your super benefits into the one place, which is the self-managed super fund, and then invest together.
• 6:42
  Speaker 1: So that's another way to build your investment together with your family members.
• 6:49
  Speaker: And again, if that if it's a family business and you need family premises or a a factory, whatever it is, that can be purchased through that.
• 6:57
  Speaker: And I'll just share something on that, Mai.
• 6:59
  Speaker: When the pandemic hit, I had a very big commercial building with 22 staff, and we weren't allowed to work.
• 7:06
  Speaker: We're we're a training education company traveling around the country, but we could stop paying rent because we were the landlord that was just having that control versus if I was paying an external landlord and we couldn't work at the same time, you end up locked.
• 7:24
  Speaker 1: Hmm.
• 7:24
  Speaker 1: No, that's a very good point.
• 7:26
  Speaker 1: And I think it's the fact that when people don't really understand where should I park my money, is it best to put it towards an investment or should I put it towards super?
• 7:43
  Speaker 1: Well, super is a type of investment because once it goes into your super fund, it has to be invested.
• 7:52
  Speaker 1: So the rate of return will be there.
• 7:56
  Speaker 1: You just gotta understand, you know, what are the in investment portfolio that you have and whether or not it's in line with your financial goals.
• 8:08
  Speaker: This is so important and a coachable moment to everyone listening to this.
• 8:12
  Speaker: For your own psychology, don't call it your super fund.
• 8:15
  Speaker: It's now your investment fund.
• 8:16
  Speaker: And if you put money in that investment fund, you can buy properties, and then when you do come to that retirement age, you can sell that property, put it back into the super fund because the super fund owned it, and that's what you live off for the rest of the time that you are on this earth.
• 8:32
  Speaker: Whereas people think, oh no, you keep the property and you get the rent.
• 8:35
  Speaker: That's an option, but my brother's just gone through this, he's retired and he's quite young, but he sold the property and said, Well, he had a few, but he sold one and said, we're just gonna enjoy it off that one.
• 8:46
  Speaker: Yeah.
• 8:46
  Speaker: Because it's played its part, they'd had it for 15, 20 years or something like that.
• 8:51
  Speaker: What's your thoughts on that?
• 8:53
  Speaker 1: Well, there's a lot of um strategies that you can do in terms of putting money into super, but what I like about you know, investing in super, it's most suitable for you know people in their early 40s and older, so that you can actually put money into super, claim tax deduction, and also re-invest that money.
• 9:27
  Speaker 1: And once you turn 60, you can choose whether or not you want to retire.
• 9:33
  Speaker 1: If you do choose to retire at the age of 60, the funds that you have in your super fund can be tax free.
• 9:42
  Speaker: So you just say that again.
• 9:46
  Speaker 1: Yeah, once you turn 60, you actually reach your preservation age, which means that you can retire and access your super balance.
• 9:57
  Speaker 1: And your super balance will move from accu from accumulation account into pension account, which means that it will be tax-free.
• 10:09
  Speaker 1: So if you imagine you have a rental property in your self-managed super fund and you turn 60, we can actually move, that is your super balance, by the way, even though it's a property.
• 10:23
  Speaker 1: Um, move that super um asset into a pension, and the rent that you receive from it is tax free.
• 10:31
  Speaker 1: You don't even pay 15% tax, you pay no tax.
• 10:35
  Speaker 1: And on the rent that you receive, you can also withdraw the money out of your super and live of it and use it like your ATM.
• 10:46
  Speaker 1: And that money that you're drawing out is also tax free.
• 10:51
  Speaker: So the benefit of that is it's an income-generating asset, so you're living off that money and the property's still going up in value.
• 11:00
  Speaker: That's right.
• 11:01
  Speaker: Or you cash it in and use that money.
• 11:04
  Speaker: There's no right or wrong, it's a fork in the road, but what's your view?
• 11:09
  Speaker 1: Well, if you um are you I'm just clarifying that question there.
• 11:14
  Speaker 1: Are you talking about your principal place of residence that you sell?
• 11:18
  Speaker: No.
• 11:18
  Speaker: The super fund owns a townhouse.
• 11:22
  Speaker: Okay.
• 11:22
  Speaker: And you're selling that townhouse, the money comes back into the fund, and then if you're 60, you can withdraw that out tax-free.
• 11:28
  Speaker: Yeah.
• 11:29
  Speaker: But you could also say, let's say the townhouse sells for a million dollars.
• 11:33
  Speaker: Someone at 60 could say that would see me through the rest of my life.
• 11:37
  Speaker 1: Yeah, you can.
• 11:38
  Speaker 1: But uh the thing is too, like you you should know what you want to do with with that cash.
• 11:43
  Speaker 1: So you want to wait until your fund goes into pension before you sell.
• 11:50
  Speaker 1: Just make sure of that.
• 11:51
  Speaker 1: Because if you sell it, whilst it is in accumulation phase, even though you'd already turned 60 and you haven't convert your super balance, you're still gonna be paying tax.
• 12:02
  Speaker 1: So make sure that you convert into pension mode before you you do sell any assets in the sell in a super fund.
• 12:10
  Speaker 1: Once you do sell it, and this is subject to your super balances as well.
• 12:16
  Speaker 1: So um you must check with your advisor.
• 12:19
  Speaker 1: And um if if your balance is below a certain amount and you do sell the asset, you make, let's say, you know, $300,000 from the sale of that property because you had it for over 10 years.
• 12:34
  Speaker 1: Believe it or not, that capital gains is also exempt for tax.
• 12:41
  Speaker 1: Yep.
• 12:42
  Speaker: No capital gains tax.
• 12:44
  Speaker 1: No capital gains tax on the gains from the sale of the investment, and you can just draw it out and use it.
• 12:52
  Speaker: So the steps to make that happen, you've got to be in pension mode.
• 12:57
  Speaker: Yeah.
• 12:57
  Speaker: Or the adjustment that happens, that we've got a self-managed superfund, one of the members of the superfund has reached 60 years of age, and that person is doing what?
• 13:08
  Speaker 1: Yep.
• 13:08
  Speaker 1: The key is if you have um mum and dad, one is older and already turned 60, and the other one is not yet 60.
• 13:18
  Speaker 1: You've got to be careful with this because when do you do sell the asset, only the percentage of um that belongs to the member who is over 60 will be tax-free.
• 13:33
  Speaker 1: The other portion that belongs to a younger member will be taxable still, but it's still be taxed at a discounted rate of 15%.
• 13:46
  Speaker 1: And you do get CGT discount under a self-managed super fund.
• 13:52
  Speaker: Mai Harris, another incredible episode today as we look at this return on investment, and I hope we've got all the younger generation excited about their investment fund because there's been a uh quite a sad part of the marketplace out there where people think I'm never going to be able to buy a home, I'm never gonna get a deposit and the stamp duty, and it can seem like just too hard.
• 14:14
  Speaker: Rents are going up so high, the cost of living so much.
• 14:18
  Speaker: What's your view on that?
• 14:20
  Speaker 1: Yeah, it's about thinking ahead and have a long-term plan in place.
• 14:27
  Speaker 1: You can have it all if you plan well.
• 14:31
  Speaker 1: And if you set even though you think it's an unreachable goals, go for it.
• 14:38
  Speaker 1: Set some goals to start off with, and then you'll be surprised that you'll get there in the end, because that's how our brain works.
• 14:50
  Speaker 1: You know, we challenge ourselves and um we normally get there, and if we fall short, you you had to go.
• 14:57
  Speaker 1: So, my view is set the goals to own your own property and then have a look at how to get there.
• 15:09
  Speaker 1: And it might be, you know, contributing more into super so that you're able to access your super balance after you turn 60, especially if you're in your 40s and or you're older, it's perfect time because a lot of people still have mortgages and they're thinking, oh, how can I accelerate paying um my for my mortgage?
• 15:39
  Speaker 1: How do I pay it down quicker or get rid of it?
• 15:42
  Speaker 1: Super might be your answer because you know, you if you're in your 40s, you have less than 20 years to go.
• 15:50
  Speaker 1: And if you continue to keep paying your home repayment at this rate, you probably have 20 years to go.
• 15:58
  Speaker 1: So if you're contributing more, you're claiming tax deduction in the meantime, you're getting tax deduction, you're getting the tax break, you're getting a better rate of return on the money that you put towards super instead of your offset account.
• 16:13
  Speaker 1: And your super fund also investing that money.
• 16:18
  Speaker 1: So you're getting further rate of return on that cash.
• 16:21
  Speaker 1: So all of a sudden, instead of saving 6% on your home loan, which is well, convert that into rate of return is 6%.
• 16:31
  Speaker 1: So you might be getting 12 because you just saved so much on the tax, plus your your investments growing each year.
• 16:44
  Speaker 1: So money that money accumulates.
• 16:47
  Speaker 1: And then you can grab that money after you turn 60 and just pay off your your debt, your home loan, and it's gone.
• 16:56
  Speaker 1: And you will probably have more money than you would if you concentrated on just paying your home loan.
• 17:05
  Speaker: And if you are downsizing at that time and the property's sold, the loan's paid out anyway, it's a double win because you've removed the home loan, you've got no mortgage on the downsized property.
• 17:17
  Speaker: And I think that's such a great way that you've explained that.
• 17:21
  Speaker: And I look forward to next week.
• 17:23
  Speaker: Mai Harris, thank you for joining us.
• 17:26
  Speaker 1: Thanks, Lee.
• 17:29
  Speaker: And if you need to get in contact with Mai and her team at My Accounting Advantage, the website link is in your show notes.
• 17:36
  Speaker: myaccountingadvantage.com.au.
• 17:40
  Speaker: Thank you for listening.