Well done for thinking about your financial future

What is instalment gearing and why do we love it? Think of a savings plan on steroids where your contributions are matched by a third party. This means that you have at least twice the participation in the market although you will also have an interest cost because the third party contributing is borrowing money.

Why do we love it? Because it is flexible. We make plans but plans sometimes need to change due to changing personal circumstances, changing legislation or changing investment conditions. With Instalment gearing you can; start it, stop it, sell part of it, sell all of it, change the amount of borrowing, suspend contributions or even just suspend the borrowed contributions and keep your contributions going.

Instalment gearing is generally set up with a monthly contribution. These regular contributions provide a Dollar Cost Averaging effect (visit Dollar Cost Averaging) which gives a way to enter the market and shield your investment from some of the downside.

An example of the minimum instalment gearing plan is as follows:

You initially contribute $1,000, this contribution is matched with debt giving an initial investment of $2,000. Each month you contribute $200 and this contribution is also matched by $200 of debt giving a monthly investment of $400. After year 1 you will have contributions of $4,800 plus the initial contribution of $2,000 and you will have a loan balance of $3,400

Are you saving more than you spend? If so you already have a savings plan!

Savings plans can be whatever you want them to be; some prefer a ‘bucket’ approach with different buckets set up for different objectives and timeframes, whilst others might prefer a consolidate investment. Whatever your preference the feeling of seeing something grow can be fulfilling but when starting off a savings plan can also feel stagnant … think about saving $5,000 a year and earning perhaps 3% in super saver account and earn a whole $150 in interest and you might even be taxed 32.5% (avg tax bracket) giving net earnings $101.25, not very exciting is it?

So what can you do about it?

The power of a savings plan is the compounding effect over the longer term so stay in there, focus on an objective. Tax planning can also help optimise returns. Whose account should the investment be in? What is the best long-term structure?

What is the most tax effective investments?

Increasing the return can help with the compounding effect, the general rule of investment is that if you seek to increase the return you also increase the potential risk. This means you will need to be comfortable with fluctuating returns. There are modifications to savings plans that can include the use of borrowings (see Instalment Gearing), structures such as trusts or insurance bonds and investments such as Australian shares and managed funds.