Where’s the best place to put my money?
When it comes to deciding where your hard-earned cash should go there’s a lot to consider.
People often ask the question “Is there anything more I should be doing with my money?” They are often paying off a home loan, considering purchasing an investment, struggling with paying ever rising living costs and worried about what will happen when they get to retirement.
So how can you straddle your short and long-term goals and commitments and give yourself the best of both worlds?
Should I focus on repaying my home loan?
Paying off your home loan is one of the most common goals for Australians. With mortgage rates at historical lows directing your extra cash flow towards repaying your mortgage can be a great option. By putting extra into your home loan, you’ll pay less in interest charges as the principal amount owed on your home loan decreases.
And, as we generally expect the value of most homes to rise over time, the more you repay, the more equity you may be able to build, enabling you to retire early or look at alternative investments such as property and shares.
Should I buy an investment property?
Purchasing an investment property is a common dream. The idea that someone else pays off your property is enticing, however there is a great deal to consider.
Rental income generally doesn’t cover the cost of the investment property when taking into consideration interest on your loan, property costs such as council rates and insurance, and long term property maintenance. This means that often you will need to fund the extra costs out of your cash flow. These costs are generally tax deducible, meaning that they will reduce the income tax that you pay, but it is important to consider what this means to your overall cash position.
Property investment also relies on growth in property values and long term rent stability, but the right property, held for the long term may help you reach your long term financial goals.
Should I put more into super?
Depending on your age, it can be best to channel as much money as you can into superannuation. That’s because it’s one of the most tax-effective ways to save—you ultimately end up with more in your hand as less goes to the tax man.
And say you’ll retire in 10 or more years, in super you have the potential to benefit from compound interest and dollar-cost averaging: two of the most powerful ways to build long-term wealth.
When it comes to property, you generally have to use after-tax dollars to repay your home loan. But in super you can deposit pre-tax dollars, often with minimal or no impact on your take-home pay.
By salary sacrificing money into super (although there’s a limit on how much you can deposit each year) less tax is applied to your income so it’s likely you’ll lower your overall tax bill each year as well.
So what’s best for you?
So what if you’ve got some extra cash—how do you prioritise?
There’s no blanket answer to this question as everyone’s situation is different depending on your current circumstances, such as your current super balance, income, family situation, personal goals and time to retirement.
That’s where financial advice can make a big difference.
A visit to a Financial Planner can help you clarify your goals and prioritise your spending. We can help make sure you will be comfortable and have everything you need in retirement whilst making the most of life right now.
You may not need to choose one option over the other. You may be able to have the best of both worlds and if property or investment is the best option for you working with a team of aligned professionals will ensure the best outcome.