Gearing simply means borrowing money to invest. Gearing may be used with existing savings to accelerate the process of wealth creation by allowing an investor to make a larger investment than would otherwise be possible. The borrowed money can be invested in a number of ways, including direct shares, property and managed investments.
Negative gearing occurs when the interest payable on borrowed funds exceeds the net income received from the investment. The investor must have surplus income over and above their day-to-day living expenses to meet the shortfall. Gearing can be an effective strategy if the after tax capital gain return of the geared investment exceeds the after tax costs of funding the investment.
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