What would you do with $5000 a month?

I'm in a somewhat unique position in that I am nearly 40 with a wife and two kids and decent income, but because of years of non-profit work I do not have any significant investments or savings. However, we also have no significant debt, so our situation is "virgin" in some ways. My wife also works.

We are settled in Sydney now, and are ready to stay put and save $5,000 per month. When we hit 100k (well under 2 years) we'd like to make our first major financial move. We're leaning towards conventional wisdom and purchasing our own home (which will cost between 700k-780k) first, then using the equity to invest in property. However, we are not stuck on the idea of having to own our own home. We're thinking more along the lines of wealth. My income is 140k p.a., so negative gearing is a definite option.

We're very much open to renting and building wealth with investment properties, but because I already have two school aged children and a job in the Sydney CBD, we're pretty much stuck with a fairly high rent of around $2,500 per month (which is actually really low for our area), that still requires me to commute 1.5 hours each way. According to my (admittedly rough) calculations the cost of rent pretty much outweighs the benefits of owning an IP, even with negative gearing.

My wife and I are very new to investment and finance management, but we're really interested in using our income in a smart way to create positive cashflow and capital. I wouldn't say I'm willing to take serious risks at this stage, but I realize that any investment has some form of acceptable risk attached. Obviously we need to speak to a financial advisor, but I'm just curious about what some of you might do if you were in my situation. What would you do?

 

This is just my opinion and obviously you should speak to a professional (if you can find one who is willing to align your interests with theirs - which can be a hard)...

If I was you, I'd take that $5000 a month and invest it every month into shares and just dollar cost average into broad Australian based Exchange Trade Fund (ETF) like VAS, IOZ or STW.

That said, at 40 years old you could also consider contributing more to Super.

I also think renting offers far better value than buying your own home at this stage. So I wouldn't be in a hurry to buy.

And don't always do what "conventional wisdom" says. Most people just follow conventional wisdom because they are too lazy to think for themselves and crunch the numbers.

And I think your instincts are right to not be wanting to take on large amounts of risk. My general advice is life is more pleasant when you have low levels of debt.

And more importantly, keep doing your best to learn more about finance and investments.

 

Thanks for taking the time to answer, Chris. Really appreciate that. I'm curious about why you feel shares are a good way to go. Is that because of the short term benefits that could allow me to save for a larger house deposit over time?

 

Basically because I think property as an asset class is overvalued and offers poor returns at the moment.

I'm not saying that at some point in the future it won't be a good buy, but it requires either a significant fall in prices or lift in rental yields (or both) and I suspect that good buying opportunities may be at least 3 years off.

Once again this is just my opinion of course.

For me whether or not you buy a house depends mostly on whether it is good value. I know a lot of people are very emotional about this topic, but for me I'm just as happy to live in a rented house versus a house I own (with a mortgage).

So given this, when I do the math it makes more sense to rent at the moment than buy (and by a long way).

To be completely honest at this present moment I don't think shares offer "spectacular value", I'm more inclined to call it "reasonable value", but with returns on cash dropping (ubank is now only offer 4.9%) along with my perspective that property is overvalued it makes shares look like the more attractive asset class when there are loads of ASX 200 companies that have dividend yields above 5%:

Metcash - 8.2%
NAB - 7.5%
JB HiFi - 6.4%
Telstra - 6.4%
Toll Holdings - 5.5%

And you need to factor that those dividends are fully franked (ie they have already had tax paid on them unlike interest on cash or rental yields which still need to pay tax) and those returns don't include retained earnings by each of those companies.

Please keep in mind I'm definitely not recommending any of those companies either, they are just examples, but there are literally dozens of reasonable companies with dividend yields of 5%+, and many with PE ratios below 12.

It's just my humble opinion that if I had to park my money somewhere for the next 10 - 20 years it would do a lot better in shares than other asset classes.

That said, If I had to guess, I'd say over the next 12 months bonds probably have the most positive outlook, but with Euro debt crisis (and what will be headline news in the next 12 - 24 months - Japan's debt crisis) I just don't like bonds as a long term asset class and my thinking is if you don't think something is good value over the long term you shouldn't buy it for the short term just because you think you can flip it for more.

 

That makes a lot of sense. Thank you for taking the time to explain your opinion. I realize it's just an opinion, but that's exactly what I'm looking for. I'm just trying to educate myself on the various options. I have a lot of learning to do, but at the same time I want to gather as much information as possible as soon as possible so I can act on something in the next months, rather than timidly sticking all my assets in a term deposit or something "safe" like that. Thanks.

 

Glad to help.

Just as long as you realise that the best thing you can do is go and learn as much as you can yourself and find out what best suits you, because the truth is I have no idea what your circumstances are or what the future holds, and what looks like a good or bad investment today might be completely different in 6 or 12 months time and it's more important to learn to recognise good value and understand finance and investing than to know what someone's opinion is on what is today's best investment.

 

MenDAKE,
What are your long term goals?
If you current superannuation is low, then you need to consider building your asset base both inside and outside of super. Perhaps 20 to 25 years to retirement, consider what lifestyle you want to be able to retire on (i.e. 70% of current post-tax income), then a rough rule of thumb of 20 times that as an income generating asset base.

It is likely that you can retire on that level by investing $5k a month for 20 years. The issue will be the vehicle. Super limits you to $25k pa in tax concessional contributions, although you could contribute post tax. The limitations with super are described elsewhere but access is a major issue to younger investors. Unless you go down the SMSF path, super assets are a mix of equity and fixed interest in large part. My view is that you need to look further than just the share market to better diversify.

To an extent I agree with ChrisC, unless the emotional need is to own your own home, renting is often a lower cost option as long as you do something with the difference in monies paid. Renting enables you to live in areas you may not be able to afford to buy in or live in a place you could not afford to buy.

With a $100k deposit, you could easily buy a $450k investment property (around median price), rent yield of 5% (easy to achieve in Sydney), at current interest rates your after tax out of pocket may be as low as $2k pa. Residential property has had a long period of growth and unlike a company it is highly unlikely to go into receivership with no value.

My view as a property investor is that well located property will continue to show growth and good rent yield over time.

While you are building your deposit, consider whose name it should be in (lower income earner) and then if you go down the property path, consider again ownership structure.

If you are considering buying as an owner occupier, a $750k home with only a $100k deposit, you will pay a large lenders mortgage insurance (LMI) premium and the cost of servicing the loan even as an interest only loan will far outweigh the rent you currently pay.

Structured well, an investment property gets you into the property market, your tenant and the tax man help pay it off for you and you have an asset you can add value to over time. You can insure it to minimise your risks, also consider your own personal risk insurance.

Consider increasing your knowledge, Jan Somers books are an excellent start and easy read.

Good luck with the future.
Greg.

 

First since you are locked into Super from your partners and your jobs I would look at SMSF, there are now some online companies to take some of the pain of management away at lower costs than traditional Accountants.

Pro - Taxed at 15% on income instead of your marginal rate.
Can recive contributions from both you and your partner.

Con - locks you into the work till you hit retirement age or transition to retirement.
Paperwork will need to keep track of your plans and investment choices.
You may be locked in with an online service for bank accounts, loans and broker. They from what I have seen are not bad choices though.

In my case my Super pays my life insurance each year and in 17 years time I may be able to buy a nice TV with whats left.

Discretionary Family Trust my investment weapon of choice. Personal Trustee if your in a low risk of being sued job or Company for best asset protection.

Pro can stream income to lowest tax bracket family members with attached franking credits.
Can invest in any asset class you want.
Asset protection.

Con It does have a set up cost and you need to lodge a tax return for the trust. Company if required will have a set up cost and yearly or 10 year filing fee to pay.
Once you hit the small shareholder franking credit limit, currently $5000 you may have to make a family trust election which has to be a living person to give you a path of how tax effective distributions can be made.

Property V shares is for another post.

 

The problem with this decision in 2012 is that property has now gone up X percent (depending on where in Sydney you live could be as much as 30%)

Generally Sydney property delivers 7% growth - yes it is cheap to rent (about 3% yield) but only if you are saving a significant portion of your salary every month to buy into equities.

 

Is NAB fully franked at 7.5%?

Does that mean I won't be taxed on my dividend as soon as my tax rate is <= 30%?

 

That post is fairly old, yield on current data is 7.28% fully franked.

If your tax rate is below 30% you'll get a refund when you put in your tax return. If it (your tax rate) is above 30% then you will have to pay the difference.

 

Still 7.28% is a bloody awesome yield. Where do you get a yield like that these days! And NAB is a blue chip stock very safe to keep long term. You get $7 for every $100 invested tax free ... Excited!

 

It's had troubles and it's price is the same as 2000. Only one of the big 4 I don't own directly, I no longer buy direct stocks so unlikely to ever own it. The other banks yield less today, however they have had strong growth over that time in both price and yield. Just looking at a snap shot of today isn't ideal.
Beware the yield trap, chasing yield today can hurt you down the track. I'll be the first to admit I know little about where nab is heading and if they can change their fortunes around, just giving you food for thought (hopefully).

 

Here's a link where Peter thornhill explains it in a short video.

Welcome - Motivated Money

 

You have a set amount to invest every month? Go with shares, IMO.

I think the beauty of investing in shares in your situation, is that you can take that amount, and "dollar cost average" in. When shares are more expensive, your $5000 buys you less of them. When share markets have fallen and shares are better value, your $5000 buys you more of them. It works out well over time, and is an incredibly simple and stress free method.

Note - this only works if what you are buying is the same, diversified instrument every time - e.g. an index fund ETF, or a listed investment company (LIC). The same rules don't apply to buying single companies, which can go bust. And you can't buy a portfolio of them with $5000 each month, without blowing your budget on brokerage.

I'd recommend an ETF like VAS

 

I am in this situation and have 5k month going into Forager, Magellan, Perpetual WFIA managed funds, a bit of cash and an ABC bullion gold account.