Should you pay off your home or start investing?
I’m going to disclaimer this one from the get go, because everyone’s financial situation is pretty different, and as always there is no hard and fast rule.
But…. For what It’s worth, for the average couple/family with a home loan and pretty stable incomes, I’ll give you my two cents worth.
For most Australians, the biggest assets you will have are your home, and then likely your superannuation account. Owning your own home outright is the great Australian dream. In most circumstances, aiming to purchase your first home is the first massive financial milestone you should aim to achieve. You always need somewhere to live right?
If you have your home under your belt and are paying it off, then directing some of your cash flow towards other investments can be a good idea, but I’ll ask you these questions first.
Do you pay more than the minimum off your home loan comfortably?
Do you have excess income each month, and how much is it?
Do you live within your means?
Do you have any major purchasing coming up that you may need the money for soon?
If your answers are Yes,Yes,Yes,No, then directing some of your cash flow towards investments could be a great idea.
Paying down debt is always a good idea, and if you are paying over the minimum then you are already ahead of the pack. I would also hope that you have an offset account further working towards reducing the debt.
Most people don’t know this, but if you have just $100 excess income per month, you can start an investment portfolio. You won’t likely notice the money over the month, but the longer you do it, the longer you have the advantage of the compound effect.
Throwing all of your money into your home loan is great when it comes to paying off your debt, but it doesn’t do much for growing your overall wealth. If you diversify, pay off your debt faster and start investing, your financial position will be better in the long run.
If you invest $40,000 for 20 years or 10 years, there is a substantial difference in the end amount. The longer your money is in the market, the better off you will be.
What do we do?
We have paid off the majority of our home but still have some debt, and we have an investment portfolio too. It’s not necessarily for everyone, but it is for us, and I am all about practicing what I preach.
This post is from our resident Financial Planner Cara Brett, check out her details in the About Us section.