Invest…. Or Reduce Debt?

Invest…. Or Reduce Debt?

This is a question I get asked a lot. And I mean a lot.

In fact, recently I was asked the same question by one of my own team members. They are in flux. Use cash and borrow to buy an investment property or just pay off the home loan and not have to worry about debts on your main home.

Everybody is different. What works for one is not necessarily what works for another.

I can tell you what I did. I went mad and paid off my home loan which meant I was debt-free on my home by the age of 38. And once I had that peace of mind, I did not borrow on it again.

Now, from an investment point of view, that is plain stupid. This just enhances and adds credence to what my wife and kids have been saying about me for years. I could borrow from it, invest it and make more wealth.

But then again, I wonder what for. The way I have my investments right now, I have more than enough for retirement. As I get older, I will spend less, which means all I am doing is taking on more stress to create more for my kids to blow. As I say to my kids, I enjoy blowing their inheritance. My job as a father is to give them the right values and set them up with a good foundation financially. Anything more, and I may be spoiling them.

Anyway, I am getting off the point.

Because with interest rates at their highest point, putting savings to work on your mortgage may make sense – but is it costing you an arm and a leg?

You see, saving $200 per week on your mortgage over 30 years will save you a total interest of about $558,580. Imagine that. A nice Aston Martin sitting there waiting for you on your drive. Except you will be so old, you will look hilariously stupid when trying to get out of it.

But if you were to invest this money instead, assuming the average share market return of just under 10% per cent, the payoff could be just over $1.5 million. That’s a $1 million more, and you cannot laugh that off.

Imagine that. An Aston, a Ferrari, and a Lambo are on your driveway, just itching to make you look hilariously stupid.

But on a serious note, if wealth is what you are after, this article could seriously make a difference.

So, if it is that simple, why are we not doing it?

Well, we are an instant society, which means we want results. When do we want them? We want them now.

Err….. investing does not work that way.

In the short term, the difference between making extra repayments on your mortgage compared to investing are minuscule. But over time, the difference becomes enormous.

Let’s put some figures in the mix.

If you put an extra $200 a week to your mortgage payments it would save you interest of about $300 in the first year. It’s not really a figure to get excited about.

Equally, if you invest $200 a week, it would make you $480 in the first year. After three years, the mortgage has you approx. $2,900 is better off compared to $4,900 for investing.

But you need to understand something called compounding. Because after 10 years the difference is approx. $33,500 and after 20 years it is approx. $241,000. Now that is worth getting excited about.

Most people focus on the short term, but when you do that, you lose focus on long-term benefits.

If you don’t want to be as stupid as me, where do you start?

It’s all well and good saying invest but if you are new to the game where do you put your money?

We would always say to see a financial planner.

But I know many don’t want to see one. It’s not like the investing community has a great name when it comes to investing your money.

Often, when I meet financial planners, they love telling me what a great product or plan they have and what wonderful returns they have achieved. Don’t get me wrong; many may have done this, but I always tell clients that numbers never lie.

And what the statistics show is that historically, index funds have been the best-performing investment more than 90 percent of the time. In fact, I cannot think of a single investing firm, stock broker firm or financial planner that has beaten the market after fees consistently for 5, 10, 15 or 20 years.

There is a reason why Warren Buffet is a fan of them. I have invested my own children’s investments in just 3 index funds. And since we started, they have grown by about 30% with no losses.

Compare this to my own portfolio which invests in a mixture of individual shares, indexes and alternative (speculative) investments. The speculative ones have been a bit of a disaster. The individual shares have done very well overall, but I am sitting on some paper losses for some of them. The indexes? They are all up – some significantly.

Index funds or ETFs are known to have a benefit in that they spread the risk of that index. Because there is little speculation or strategy involved, the fees are very low. Some financial planners will charge about 2% of your fund value. An index fund might be about 0.5%. And as my previous articles have shown, when you compound advisor fees, the effect on investments can be dramatic.

Where to Start?

I am going to state the obvious.

Everyone is different, but one thing will always hold true: Do not invest money in an index fund if it happens to be your emergency money.

For example, you have a mortgage offset account, and putting your emergency money (in case the dishwasher breaks down) in an offset account makes sense because you may need it quickly.

Equally, money in the stock market is money you don’t need. The way I say it is any money put into the stock market you must assume you do not have.

Do I regret paying off my home loan rather than invest? Sometimes, but rarely. Thats because there is nothing better than a good night’s sleep knowing I do not have to worry about making payments, falling behind or worry that a bank may walk up the path with a new lock and key.

And I have, over my career, had numerous discussions with clients who still have significant mortgages in their later years, or suddenly have lower income and cannot afford the mortgage or simply got themselves in financially difficulties. These discussions are tragic.

They are mostly painful and emotionally charged. I never want to be in that position, so for me, having a few $$$ less in later years is something I can live with.

Investing is step 7 of our 9 steps to earning more, working less and creating wealth. If you want to know more contact Hitesh at or call 07 3161 9548.


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