Gearing means borrowing money to make an investment and the main objective is to generate investment returns that exceed the cost of borrowing (after-tax). Some guiding principles when considering gearing:

• Gearing is a long-term (five years plus) investment strategy – when deciding to undertake a gearing strategy, consider more than just the immediate tax deduction.

• Investments in assets such as Australian and International shares and property are generally recommended – the key to gearing is capital growth and, therefore, you generally need to invest in growth assets.

• Gearing best suits those within the higher marginal tax bracket who have a reliable cash flow – appropriate financial protection (income protection and life insurance) is recommended.

• Personal debt and home-loan balances should be reduced – this debt is ‘bad debt’ as it is not tax-deductible.

• Always leave yourself a buffer – you don’t necessarily need to borrow as much as the bank is willing to lend you.

• Before making a decision to borrow money to invest, you need to consider the different ways you can borrow money to invest – various loan types and interest options are available.

• Borrowing to invest can magnify your returns and the associated risks – you should expect your investments to rise and fall in the short term and be prepared to understand and meet the possibility of a margin call.

If you would like to create wealth through gearing, your financial adviser can help you to decide whether gearing is a suitable option for you, and if so, can help you select the most suitable and cost-effective option.