Charting a course through the world of financial management often throws up a heap of complex questions.
One such crucial query that leaves many in a quandary is how to best utilise extra savings. Should you funnel these funds into investments or apply them towards reducing your mortgage?
The response to this question isn’t a one-size-fits-all, as it relies heavily on individual financial conditions and personal risk tolerance.
Advantages of reducing your mortgage
Typically, using additional savings to pay down your mortgage is considered a safe and prudent choice. It’s a clear and simple way of using extra money to create a more secure financial future. The strategy here is pretty straightforward – each dollar you contribute towards your mortgage reduces the total interest you’d end up paying over the loan’s lifetime.
You’re essentially accelerating your path towards being debt-free and simultaneously lowering your financial risk exposure. In this sense, it’s like creating a safety net for yourself, making this approach an uncomplicated and reliable strategy for managing surplus funds.
The potential upside of investing
If you’ve made significant headway in your mortgage repayment journey, channelling extra savings into investments might provide superior returns.
Here’s the logic: carefully managed investments can potentially offer returns that surpass the savings you’d achieve by reducing your mortgage interest. For example, a well-diversified investment portfolio, including different asset classes like stocks, bonds and other assets beyond just property, has historically returned ranging from 5% to 10% annually over the long-term.
In contrast, your mortgage interest might be around the 5% mark. The additional benefit of investing is the opportunity to expand your wealth across a variety of areas, not limiting yourself to property.
“If you’ve made significant headway in your mortgage repayment journey, channelling extra savings into investments might provide superior returns
Essential factors to consider before investing
Before diving headfirst into the investing pool, it’s essential to evaluate a few critical factors. Job stability takes centre stage, as regular income is crucial to maintain mortgage repayments. Remember, investing isn’t a quick win but more a long game.
Aim to keep your investments for at least five years to align with the typical timeline for long-term financial growth. And don’t forget about diversification – spreading your investments across different asset classes can protect you from excessive risk, providing much-needed financial stability.