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$100,000- To Spend or Save?

With many Australian consumers paying off multiple forms of debt (mortgages, personal loans or credit cards), it can be difficult to
assess whether to either pay off debt or invest a handy sum of inheritance. But with the prospect of earning appealing returns on
investments, or paying off that pesky personal loan, Sophie Richards analyses which is the best method for spending cash

When presented with the benefit of a lump-sum inheritance, monthly cost of high expenditure for the single individual, and
it is integral that investment objectives for the client are subsequently decreasing the unnecessarily high expenditure
established in order to aid in the process of financial within the budget, this will contribute to providing additional
decision-making. An investment objective is a client surplus funds each calendar month:
information form used by registered investment advisors that  Reduction in food expenses- $500 to $394 (saving of
aids in determining the optimal portfolio mix for the client, $106 per month) 2
with each investor requiring unique investment objectives  Reduction in clothing expenses - $300 to $229 (saving
that are affected by short and long-term needs and of $71 per month) 3
requirements. The following key investment objectives have  Reduction in entertainment expenses- $500 to $400
been devised for Miranda Jones, based on the two strategies (saving of $100 per month) 4
devised, to successfully enhance her overall financial
position: The following graph depicts the client’s financial position
once the lifestyle changes have been implemented, against
Key Investment Objectives Demonstrated by prior inheritance figures:
Increase in capital growth Increase in net assets (i.e.
balance sheet)
Increase in liquidity Increase in monthly income
(i.e. income statement)

Based on the provided evidence, Miranda Jones, a young
professional, currently withholds a budget surplus of $318
per month (by subtracting monthly revenue of $4583 from
expenditure of $4265). By analysing monthly income and net
assets, it is evident that she has limited surplus funds each
calendar month, resulting in the inability to effectively budget

Average Australian Single Individual's So, with an additional disposal income of $277 per month,
Monthly Expenditure vs. Miranda's what is the best way to increase Miranda’s financial position
Situation into the future?

Strategy A has been devised in order to improve monthly
Medical revenue (i.e liquidity) and net asset value through the
Transport minimisation of the high interest-bearing loans and investing
the remaining inheritance in shares. The steps taken to
implement this strategy are as follows:
1. Pay off high interest-bearing loans:
a. Unsecured Westpac Personal Car Loan,
Food current balance of $15,000 at 10% per annum
b. Westpac Visa Credit Card, amount payable
0 200 400 600 800 equating to $3,000
Australian Average Miranda
2. Invest the remaining $82,000 inheritance within Rio
Tinto Limited shares, assuming a diversified growth
for the future. As further demonstrated by comparing the
strategy of mixed investments in a managed fund
Australian average monthly expenditure for an individual1
covering the following 6 basic asset classes:
against Miranda’s position, it is clear that cutbacks could be  World Equities
made to improve liquidity and cash flow situation, within the
 Asia (ex-Japan) equities
areas of clothing, food and entertainment expenditure (as
 Emerging equities
shown on the graph).
 Australian equities
By making slight lifestyle changes in order to improve her  Unlisted commercial property
current financial position through analysing the average  Australian REITS

By paying off the remaining debt from the client’s financial As demonstrated through Miranda’s financial position, from
portfolio, the overall value of the net assets has increased to eliminating the high interest-bearing loans from the client’s
$155,500 from $55,500, thus providing an increase in capital portfolio increases the net asset value to $155,500. This
growth for the client. demonstrates a substantial improvement in overall capital
growth, with the increased budget surplus and mortgage
Assuming that the expected annual return on a diversified savings contributing to an increase in liquidity.
growth investment on the ASX returns 7.3% p.a. and that the
tax payable on share investment income is at the marginal Based on the above impacts on the key investment
tax rate of 32.5%, Strategy A provides the client with an objectives the most appropriate recommendation for Miranda
additional income on share investments of $201 per month is Strategy B (i.e. paying-off the high-interest loans and use
(equating to $2412 per year). The implication of withholding the balance of the inheritance to reduce the mortgage
this tax rate includes the addition of the additional balance), with the following improvements observed:
expenditure entry to reflect the tax on share investments,
which equates to $65 per month ($780 per annum) which  For liquidity, an improvement of 4.6 times increase in the
decreases the overall monthly budget surplus available for monthly budget prior to the inheritance; and
Miranda.  2.8 times greater improvement of capital growth
(increase in net assets).
Furthermore, Rio Tinto Limited shares have been selected
as an appropriate investment option, due to the prominence To achieve this advance in liquidity, the following
of the Australian mining sector on the ASX, in particular Rio improvements in expenditure were made:
Tinto being one of the world’s largest diversified resource
 Reduction in monthly mortgage payments of $476
companies with a ranking of Top 25 listed Australian
per month (i.e. $1,451 per month before inheritance
companies. With the equitable share price of $51.56 per
to $975 per month after inheritance).
share5 that provides a stable investment return, investing the
remaining $82,000 within shares provides Miranda with the  Paying out all of the high interest-bearing loans (i.e.
benefits of increasing the value of her capital growth equating to the lump-sum payment of $18,000)
projection. As the value of the shares are generally projected resulting in a total monthly saving of $394, as a
to inflate over time, the revenue generated as a result result of the obliteration of monthly repayments.
increases. Furthermore, investing within Rio Tinto shares will  Reduction in discretionary expenses totalling $277
provide Miranda with an acceptable rate of income over time. per month, by researching average monthly costs
for the client to work towards.
Unlike term deposits, dividends from equities can have
inflation built into earnings where corporations are able to Overall, by using the inheritance to better manage the loans,
pass cost increases onto customers. The major risk of a monthly saving of $870 can be achieved which is
investing within shares is the risk of capital loss, where approximately 75 percent of the total savings possible under
investments are not 100% guaranteed against fluctuations Strategy B.
on the share market and therefore can carry the risk of a
Under strategy B, the overall value of the net assets has
decrease of market value. Furthermore, by erasing high-
increased from $55,500 to $155,500 through:
interest bearing debt from Miranda’s financial portfolio, the
ability to invest for the future is maximised through Miranda’s  Reduction in mortgage balance (i.e. $250,000 before
monthly income increase of $394. inheritance to $168,000 after inheritance)
 Reduction in high interest-bearing loans (as explained
Furthermore, Strategy B has been devised to improve capital
growth and liquidity for the client by paying off the high-
interest bearing loans of $18,000 (as mentioned above in Through the 2.8 times better improvement on capital growth
Strategy A) but using the remaining $82,000 inheritance to demonstrated in strategy B, it is evident that the financial
decrease the current mortgage balance of $250,000, position of the client’s net asset position is consistent
improving the net asset value. Through eliminating these throughout both strategies. This is due to the reduction in
loans, the unnecessary interest repayments are removed motor vehicle and credit card loans, which were high-interest
and the client’s individual credit rating is further strengthened bearing finances and therefore have positively impacted the
thus contributing to a heightened m,budget surplus. This value of the client’s capital growth figure in both
action further reduces the overall term of the loan from 30 to recommendations.
15 years. This in turn will reduce the interest payable from
$272,360 to $143,640 (total savings of $128,720), as seen In summary, Strategy A and Strategy B produce the following
below. results on the two key investment objectives of improving
monthly liquidity and capital growth:

5 Share price as at 2/05/2016
repayment in contrast to $1,451 before implementation of
strategy B).

Generally, the level of return on specific investments will
reflect the under lying risk of the investment, where an
investment that appears to provide an appealing return may
not be appropriate if it carries an unacceptably high risk of
volatility (fluctuations in investment returns, based on
financial position of the corporation). Furthermore, when
comparing the monthly expenditure of both strategies,
strategy A withholds higher expenditure ($3,660 per month in
comparison to $3,118 under strategy B). This is due to the
high amount of the original monthly mortgage repayments
($1,451 per month for strategy A) and the additional taxation
expense on share investments at 32.5% ($65 per month,
When comparing the viability of both strategies, it is evident equating to $780 per annum).
that although strategy A provides the client with a monthly Overall, by implementing strategy B as the most effective
income on share investments of $201 (equating to $2412 per recommendation for the situation, the client will gain an
annum) after paying off the high interest-bearing loans, it
enhanced monthly budget surplus, higher value of overall net
provides no immediate return in the short term and
assets through the eradication of high-interest bearing loans
encompasses a high level of investment risk, if the share
and reduction in mortgage balance. Further, this will improve
price was to dramatically fall. In comparison, although
Miranda’s financial position now and into the future and
strategy B provides no additional monthly revenue, the effectively utilises the inheritance that has been received.
monthly budget surplus is superior due to the reduction in
mortgage repayments by applying the balance of the
inheritance against the housing loan ($975 monthly