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Loan reduction is smart move

THE three issues that stand out when evaluating Stephen's progress in achieving his long-term financial goals are the tightness of his cashflow, the slow rate at which his regular loan repayments are paying off his home loan and the need to ramp up his superannuation savings.

THE three issues that stand out when evaluating Stephen's progress in achieving his long-term financial goals are the tightness of his cashflow, the slow rate at which his regular loan repayments are paying off his home loan and the need to ramp up his superannuation savings.

About $40,000 a year or nearly 55 per cent of his annual income is being consumed by his loan repayments. That leaves him with only a small surplus cashflow of about $4000 a year, or even less if he lives on more than his estimated $15,600 a year.

He is right to focus in the short term on reducing his home loan. His regular loan repayment of $277 a week is barely covering the interest. Apart from reducing the amount he will ultimately pay to the bank, accelerating the repayment of his home loan is tax effective because, unlike his investment loan, interest payments are not tax deductible.

He is currently on track to retire with about $275,000 in super (in today's dollars). This should provide him with a pension of $60,000 (in today's dollars) for a little under five years or $30,000 for about nine years hardly a great outcome! If he cranks up the super savings by salary sacrificing $10,000 each year into super he could have about $550,000 by the time he retires. Salary sacrificing would save him tax and also enable him to draw a pension income of $30,000 for about 24 years. All additional commission income and surplus cashflow should be directed towards reducing his home loan.

Mike Ingham Godfrey Pembroke


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