Have you ever wondered what to put extra into? If it’s better to pay off your Mortgage or boost your Super?
First, congratulations – if you’re wondering which one, it’s likely you’ve got surplus cashflow and you’re taking control of your money. Gold star!
So, the common thinking is, debt is ‘bad’ and we should be using surplus cashflow to pay off the home loan as quickly as possible.
But is it that simple?
Of course, your first priority should be having a strong money foundation – that means no personal loans or credit card balances owing, and your Rainy-Day Reserve in place.
And, after that?
There’s no one-size-fits-all answer. But let’s look at some of the factors you should be considering:
- Your stage of life.
- Your risk profile – whether are you a conservative investor or more growth-orientated.
- The interest rate on your home loan.
- Your super balance and how it’s invested.
- The power of compounding.
- The big one – your ‘sleep at night test’.
This decision is about more than maths!
On the face of it, the maths makes a compelling case to build your super – tax-breaks on certain contributions, the effect of compounding on returns in super (assuming you’re using market-linked investments). Meanwhile, home loan interest rates are at historic lows (even if they’re expected to rise).
You might be getting an 8% p.a. return on super and paying only 3% p.a. on your home loan – so the answer is super, right?
Financial decisions are about psychology as well as numbers – our emotions play a bigger part than we realise.
So, if you’re really not comfortable having debt – which could be influenced by your parent’s attitude to debt when you were growing up or be as simple as the ‘Aussie dream’ of owning your own home outright – then that’s going to play a big part.
Similarly, your risk profile – whether you prefer making investment choices that are more certain and stable, or whether you are prepared to take some risk with the aim of improving your returns in the longer-term – shifts the ‘maths’ if you are comparing one against the other.
Here are some other issues to consider.
Am I ‘on-track’ to have enough super upon retirement?
The MoneySmart website has some great tools, and the Retirement Planner is one of them – it’s a simple tool but it gives you a start point.
So, is your super looking a bit low? – career breaks and part-time work can quickly affect the balance.
Options available to boost your super include salary sacrificing – extra contributions on top of what your employer already puts in there. And for many people, it has some good tax benefits – so one to discuss with your Accountant.
According to MoneySmart:
“The payments, called concessional contributions, are taxed at 15 percent. For most people, this will be lower than their marginal tax rate. You benefit because you pay less tax while you boost your retirement savings.”
You can use the MoneySmart calculator to see how much you’d have at retirement if you make extra pre-tax (concessional contributions).
There are also options to make after-tax personal super contributions – made using money from savings or from your take-home pay into super. These types of contributions may be tax-deductible, but even if they’re not, the returns in super are tax-friendly.
You could also speak to your super fund for advice on your investment options – different investments have the potential for different returns. So, it’s important to a) understand options available and b) that you’re comfortable with the risk/return trade-off.
What if I retire with a home loan?
You have a plan for when you’ll retire – great. But of course, not all things work out as planned.
So, if you had to retire a bit earlier than planned, and you’re still paying off your home loan – how would you feel?
While the common goal is to have your home loan paid off by retirement, it’s not necessarily the end of the world if you still have a home loan when you stop working – hopefully only a small or modest one.
It’s likely that the rate of growth of your super balance is going to outpace your home loan interest – but of course, there’s a lot of factors that can change the ‘maths’ on that comparison.
What’s important is to realise there are options. So do the sums and make an informed choice – and recognise what your ‘sleep at night test’ will be.
Do you understand the choices you’re making today?
Everyday we make financial decisions – whether it’s the daily stuff of a packed lunch or a takeaway lunch, to the bigger ones, like buying a new car or a second-hand one.
All of these – the small decisions to the big ones – have an impact on your financial future! And whatever decision you make today isn’t necessarily a decision you should be sticking with forever.
Importantly, deciding on paying extra to your home loan versus super is something you should revisit regularly. As bank interest rates move and markets fluctuate, the option you decide today may be different from the one that is right for you in the future.
And hey, maybe, the right option for you is a bit of both!
So, the two questions I have for you are:
- Do you have a plan and financial goals – an understanding of where you are now, and where you want to be?
- Can you make financial decisions, to achieve your goals, with confidence?
If the answer is “yes” – that’s great.
And if the answer is “no” – that’s okay, the first step is recognising that fact and the second step… what are you going to do about it?
These days, there’s no shortage of information, thanks to the internet. But if you’re like most people, that can leave you overwhelmed, and no further forward in making a decision – but it doesn’t have to be that way!
If you’d like the support of a money coach – working through a structured process that begins with where you are now and where you want to be, book in a chat with Victoria.
Victoria Wallis-Smith, Nutshell Money
With a good graduate job and a pay packet to match – she figured she had it made! But very quickly, Victoria started to realise that the glue holding it all together was debt – home loan debt, credit card debt, personal loan debt. And no savings against a rainy day.
Victoria had dreamed of living in another country. So never one to do things by halves, early in 2000, she quit her job, sold everything, and relocated to the other side of the world. In her own words, dumb luck was on her side – and she managed to clear her debt, and was ready for a fresh start in Adelaide.
Fast forward 20 years… and Victoria had shifted careers from civil engineering to financial planning, and together with her husband, was running a successful business, advising people about money. But she knew she had more to offer in her career – and had the drive to help people with everyday money challenges. Nutshell Money was born.
And outside of work – you’ll find Victoria enjoying a glass of wine and as an avid traveller, she loves to hear tips on favourite travel destinations!