Doing it right!

The 3rd true story in a serioes of four on teaching kids money sense.

My third true story on children and money comes from a long time industry colleague, Peter. 3 boys now all married and financially independent with families of their own and it was easy- as he likes to say. Peter understands investing probably better than anyone I’ve worked with globally in the investment industry over 30 years. He is a no BS- ‘punch right between the eyes’ sort of bloke. He also has a lovely family, wife and lifestyle. Peter is also a mentor of mine.

As soon as they could, his kids took on jobs. The eldest at a local garage. He had enough to invest $25-$50 a month. To access investments with low amounts Peter had him invest in a managed fund. Cash-flow management via ‘Pay Myself First’ rule (placing a portion of income for investing not spending). Graduating high school his son had a 4 year employment and savings record.

Peter helped him create a business plan for the local bank for a loan. Not for a depreciating asset like a car, but to invest in quality large Australian businesses (like the bank they were standing in). The bank said no, because it wasn’t for holidays, jeans, phones, movies or cars. Peter helped him find a way thru the lunacy of banking these days and at 18, his son could now work late shifts whilst continuing his studies and be paid more too.

Dividends paid from his investment were ALWAYS reinvested. He never cared about the price/value of his investment month to month.

Graduating after 3 years from university, he gets a job and converted his bank into what’s called a Margin Loan. He can now borrow against the value of his investment and no guarantees required. Once a year he would use any appreciation in his investments value to borrow more and buy more investments. Then his full time job paid for a scaling up of the whole thing (he was renting). The interest by the way on this loan is tax deductible. Years pass, boy meets girl, boy gets married. They rent for a few years longer but bought when they were booted out with a 3 month old baby. Now time to buy a house.

Liquidating his entire portfolio, he by now had a 6-figure deposit. This reduced his purchase cost by avoiding compulsory mortgage insurance - $24,000. A modest but affordable home ensued. Just one thing, the loan he took was conditional on the bank also providing a ‘Re-draw’ loan facility (also tax deductible) that could grow in size as any ‘owners equity’ increased in the home did. This was used to buy back those same investments and keep adding to them.

But now a different form of a snowball growing was created.

Dividends were redirected to paying down their home loan principal (non- tax deductible portion). This created a greater amount that could then be redrawn on the Re-draw facility to buy more investments. A positive spiralling up of even more dividends helped accelerate the repayment of the loan used to buy the house. They didn’t yet upgrade their home and wasted more in tens of thousands of fees and duties (Their friends had nicer homes in the early years).

Ten years on, child 3 arrives and their second home is purchased. Their old home however was now FULLY PAID OFF. They required only a $200k mortgage on a $1million new home (as it was back in 2014). He created $800k of wealth without being a high income earner or his parents ‘helping-out’ by lessening their own futures.

The big difference in the second house purchase was their investments didn’t need to be sold off. Dividends continue to be ploughed back in, resulting in 2019 the loan is no more! If they want they can keep watching their wealth spiral up, or they can siphon a bit off to pay for a few luxuries- funded entirely by their wealth, not their wages.

Self-sufficiency and security by their mid-30’s thanks to Peter.

The Key to achieving this result is in utilising a special form of investing, based upon a basic capitalistic principal that most people are not aware of. This will be the theme of my next series. My next blog is the final in the series on money and kids. 'Creatiung the right home environment for finacial success'.

What can you do to provide this support for your children?