I often get asked for advice on what people can they do with their extra money – put it into super, pay extra off the mortgage or buy an investment property?
All three are very good options and if you do one of these well, you are often doing great. The key point is that you DO one of them and do the one or even two that are right for you. There are tax and other considerations, but they are minor compared to the question: Are you doing something for your long term wealth?
If you don’t have a favourite, here are a few pointers:
I sat in a lengthy presentation by some very smart investment bankers comparing the returns of the above three methods (plus a few other ones like buying shares) and paying off your mortgage was always near the top. Hence, the most popular option of paying off your mortgage is also the safest option. Owning your own home freehold can have quite an impact on your life and free you for further investments.
Putting extra money into your super is clearly the best strategy when you are over 60 and is a great idea if you are under 25 to 30. When you are over 60 there are tax reasons why this is a great idea, when you are under 25 your money has 40 years to grow and that can make a very big difference (as you get older, children and your own home tend to become more important).
Buying an investment property is a great idea, especially if you can add value through your labour by renovating or managing it yourself. It is a terrific idea for a tradesperson or for those who have paid off their home and are too young to put much into super or those who do not go to an office every day. Paying off that investment mortgage quickly is a great way to save. You can buy an investment property earlier or even before your own home but those choices need to be carefully considered.
You also need to keep in mind that the word “investment” is very important – it is not your home and the rules are different between buying a home or an investment property – your home is for your heart to soar, an investment property is for your bank balance to lift off.
The most important thing is to do what works, something that can happen automatically.
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