A small inheritance of $5000 – but what that debt.

Question

We have been given a small inheritance of $5000. We have 2 sons under 3yrs and would like to put this money away for their future education. What would be the best way to invest this money for the best long term growth?

Other details are:

We have a mortgage-free home (value $800,000), one income of $70,000 pa and a rental property valued at about $550,000. We have a $504,000 mortgage on this with weekly repayments of $785 (locked in at 7.05% pa for one more year). Weekly rent is $490. We have no other investments or debt and about $5,000 savings. In the future we would like to invest in a further rental property that was more ‘self funding’.

Answer

It is great idea to make sure these funds are set aside right from the outset. It is very easy for that special inheritance to be lost in the general investments and expenses of the family if not careful. Sometimes, if events or pressures dictate a special need the funds can also get ‘borrowed’ and not returned.

By starting now the time horizon of the investment is generous – up to around 12 - 15 years so it relatively is easy select an investment that will perform well across that time frame. Also, it may be possible to add to the investment as time goes by if further funds are available.

If you select investments that are tax effective this will also add significantly to the future value. There are a number of investments available that will perform well and be also tax effective under current legislation.

The actual management of smaller sums is an issue and you need to guard against any fee heavy arrangement. You really have two choices: firstly, the managed set and forget type arrangement that will require little input over time or secondly, a slightly more involved purchase a few local New Zealand shares directly example.

The direct share portfolio will be cost effective over time but will need some management with dividends and the various annual meeting, bonus issue or take over/ merger matters that come with owing shares. This type of investment will be tax attractive with only the dividends (if any) being taxed.

The more managed option, either local or offshore located, is an easier road with all management taken care of, with just an annual or maybe quarterly reporting to consider.

Each has a benefit and with a smaller sum I think I would start down the managed road. While the returns might not be as spectacular as buying a few direct shares that are real winners the chance of total failure is also much lessened.

If the managed option is agreed to begin there is no reason a little direct diversity cannot be introduced later as the funds increase. Take some advice on which managed option is best for you. The range is wide and some are much better than others.

Briefly, on the other points. You have posed several good questions but to begin I cannot understand why you would have an ‘investment’ that after expenses provides less than 4.00% per annum cashflow. To have a weekly shortfall of almost $350 just does not make sense. If you have been sold the negative gearing story you need to take some real advice before you get into too much trouble.

Original Article published September 2005

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