Barefoot Budget Reaction from Scott Pape on Vimeo.

Other people’s money and money from the bank can supercharge your wealth development efforts but it is important to understand how this leverage/gearing effect works. When you borrow you will be charged a fee by the lender to compensate them for their opportunity cost. It is critically important that you minimise this fee when you negotiate your borrowing. The next step is to weigh the odds that the investment that you want to make will return more than the cost of the borrowing after accounting for the effect of tax.

Be mindful of the time horizon and the investment environment in relation to the investment you want to make. Gearing strategies are particularly dangerous in flat or falling markets, just ask the many ex home owners in the United States who saw their debts end up exceeding the values of their houses. Long time horizons introduce the possibility of you encountering a ‘black swan’ which is a highly improbable event with an extreme impact. The recent financial crisis is a good example of a ‘black swan’ event where just about no-one saw it coming.’ Black swan’ events have the potential to disrupt the very best long term investment plans.

There are absolutely no guarantees in this world so think carefully before you act.

At Noble & Associates, we will never advise you on what investments you should or shouldn’t make. What we will advise you on is the potential tax effect of purchasing a particular investment that you may be considering and we can model the impact of your geared investment decision on your cash flows with your expectations in relation to revenue and capital returns.