Beware the end of June
A big part of my work concerns disputes about bad financial advice. Over the years, I’ve noticed that I often end up talking about events that happened at the end of June.
The reason for this is, of course, tax. At the end of June people start thinking about how much tax they will have to pay. This makes them amenable to making all sorts of investments so as to reduce their tax. These investments usually involve borrowing.
The up front tax deductions from making a geared investment obscure a fundamental truth which many of my clients have learnt about the hard way. This being that every dollar that is borrowed to make a tax driven investment will have to be paid back with interest no matter how the investment performs and no matter what life events happen such as losing a high paying job. I’ve seen instances where tax driven investors are forced to enter into financial slavery – they can’t afford to pay the capital part of the loan back and to avoid having their assets seized they enter into an open ended arrangement to pay interest on the loan in the hope that something will turn up in the future.
I’m not a financial adviser. All I can say is that if you don’t want to spend years making interest repayments that you can barely afford, have your assets seized or have to borrow money from relatives, forget about the tax deduction and focus on how likely it is that the investment will perform such that you can pay the loan back with interest.