A helping hand (in more ways than one)
For many Australians (especially those in their late teens and early twenties) the thought of saving, let alone investing rarely, comes to mind. For those who do have an inclination to start investing (not just saving – there is a true and not just semantic difference), the perceived dilemma of having little to no savings often ensures it all becomes too hard to get started. Another year goes by, and nothing gets done … the procrastination cycle continues.
But, with a helping hand, a little income and the right advice, it is possible to stop the procrastination and start investing and accumulating wealth now.
Introducing Paula, Arnold and Elaine
At 18, Paula is in her 2nd year of an Arts degree at a regional university. Paula is fortunate that her parents have as part of their own goals and values to provide some financial assistance to Paula while she is studying. Paula has been able to secure some part time work as a research assistant to help with her studies but more importanly to help build up her savings and be less of a financial burden to her parents.
With $4,000 in savings and $450 left over each month (Paula has done some serious work on her budget & really determining her needs vs wants) she would like to start investing but doesn’t feel she has enough to get started.
Arnold and Elaine are Paula’s Grandparents. After receiving good financial advice and working hard, they retired years ago and are financially secure. They have observed from a distance Paula’s great work in implementing her budget and the resulting level of savings. Elaine and Arnold are encouraged and impressed by Paula’s efforts and plan’s to invest and would like to help but are not sure how?
The Challenges
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Goals |
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| Paula | •Ø Invest $2,000 of savings and start accumulating wealth
•Ø Purchase residential property by age of 30
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| Arnold & Elaine | •Ø Assist grandchildren in a financially responsible way
•Ø Remain financially secure throughout retirement
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Their Resources |
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| Income | •Ø Paula – gross salary of $12,500 per year
•Ø Arnold & Elaine – account based pension $40,000 per year •Ø Arnold & Elaine – Investment income $4,000 per year
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| Assets | •Ø Fiona – $4,000 in savings
•Ø Arnold & Elaine – Family Home $750,000 •Ø Arnold & Elaine – Superannuation $830,000 •Ø Arnold & Elaine – Investment Portfolio $125,000
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| Liabilities | •Ø Paula – Nil
•Ø Arnold & Elaine – Nil
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The Strategy
Arnold & Elaine make an appointment with Paula to see a Financial Adviser they are all comfortable with, to identify some options available to them. The Financial Adviser discusses their values, goals & expectations and offers the following recomendation for consideration:
- Arnold and Elaine offer $20,000 of their investment portfolio as third party security to Paula.
- With access to this $20,000 of third party security Paula now has the capacity to borrow $15,000 for investment.
- With Paula’s initial planned investment of $2,000 (leaving a cash reserve of $2,000) in addition to the $15,000 of borrowed money, Paula now has $17,000 available to invest in a diversified managed fund (which matches Paula’s risk profile).
- As Paula expects to have $450 surplus each month, the adviser also recomends Paula start a dollar cost averaging gearing plan of $500 per month, by contributing $250 of her own money and borrowing the remaining $250. This would leave Paula with $200 a month to cover the ongoing interest expense of her margin loan.
- As time progresses and the results reinforce the benefits of the dollar cost averaging strategy Paula would release her grandparents third party security and rely on her own investments to secure the margin loan.
Adopting this strategy helps Arnold & Elaine see their guidance and assistance make a difference for Paula while they are living, rather than purely as part of their estate when they are gone to greener pastures (it would be appropriate for the Adviser to recommend that Arnold & Elaine consult their legal professional to fully understand the legal implications of offering third party security to Paula. Any agreements regarding conditions leading to removal or withdrawal of the third party security should be discussed and documented).
Getting the Right Advice
As with any financial strategy, using third party security and/or a margin loan to borrow and invest is not without its risks. One of the key risks is that just as it can multiply your gains when you invest successfully, it can also multiply your losses if your investments fall in value.
Thats why its important to get the right advice to ensure the financial strategies being considered are appropriate for your particular situation. Contact us, if you would like to review your own financial plans to take advantage of various strategies available, while minimising the risks faced.
Using third party security can help you achieve your wealth accumulation goals by building a larger investment portfolio sooner.