Capital Growth – Is it a Risk Or an Opportunity?
I love investing. Why do I love investing? Because from personal experience I can see it works. The source of our wealth is investing. Yes, the incomes we received from our jobs enabled us to invest, but we would not have become wealthy because of our jobs. Why? Because we always spend what we earn. Let me explain using one property as an example.
I purchased a property in 1997 for $165,000. By the end of 2007, the property was re-valued at $410,000. That is a capital increase of $245,000. In ten years, I would have found it impossible to save that amount: over $20,000 per year. Over those ten years, I was on an average salary of approximately $50,000 per annum. It would have been impossible to save an average of $20,000 per year.
To me, investing has been a form of forced savings.
As much as capital appreciation on an investment is very exciting, it also brings with it a level of risk.
The risk is the access you have to the capital appreciation. Loan products are available that allow you to re-finance your property to the current market value and you can access a portion of the capital growth for your purposes.
This access to the capital growth can either be a risk or an opportunity.
Let’s look firstly at the risk. Let’s say your Mortgage Broker tells you you can gain access to $100,000 on your property. You get very excited and buy a new car and a boat for your family. Let’s look at some of the downsides of this decision:
– Increased expenses: you now have to pay interest on the $100,000 loan. This is a personal expense you did not have before you purchased the car and boat.
– You purchased items that …
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