When in a cash surplus it can be difficult to decide how best to use these extra funds in a way that provides you with the greatest benefit. Contributing to your retirement and paying off debt are two effective strategies that will set you firmly on the path to financial freedom, but which approach will allow you to reach your goals faster?
Repaying your mortgage is a safe option that will allow you to save on the interest that would have accrued over the remaining life of the loan and reduce your long-term financial commitments. Without a home loan to pay, you will also be able to lower your living expenses and have the peace of mind of owning your home outright. However, it is still important to consider whether this is the quickest way to financial freedom.
Investing more into your superannuation is a tax effective way to manage your excess cashflow. Additional Concessional Contributions (CCs) of up to $27,500 can be made every year. These contributions are taxed at a rate of 15% and effectively reduce your taxable income if you earn above $18,200 per annum.
Typically, mortgage repayments are paid with after-tax dollars, meaning less of your take home pay can be used for other expenses. A benefit of CCs to your super is that personal contributions can be claimed back as a tax deduction or even made with pre-tax dollars if a salary sacrifice agreement is put in place.
For example, an individual with a taxable income between $45,001 and $120,000 who has an annual surplus of $10,000 of pre-tax income can invest $8,500 (CCs taxed at 15%) into super as opposed to only being able to make a loan repayment of $6,750 (taxed at marginal tax rate of 32.5%). Over a 10-year period, this amounts to an extra $17,500 (or $30,000 if your taxable income is over $180,000 p.a.) invested into super compared to the maximum mortgage repayment before any return on the invested funds is considered. The table below illustrates this benefit (for a $10,000 amount only).
When investing in super you will need to be prepared to endure some level of risk as market movements impact the value of your investments. Additionally, it is important to note that funds invested into your superannuation are locked and remain invested until certain conditions of release are met.
For individuals with a higher risk aversion, mortgage repayments may be the more suitable option as it is a lower risk strategy that yields savings through the reduced interest payable on their mortgage. Make the most of your financial surplus by taking action today. Whether you choose to accelerate your mortgage repayments or boost your super contributions, you’re on the path to securing your financial future. To determine which strategy aligns with your unique goals and circumstances, consult your trusted Altitude Adviser. We can help you make an informed decision that will pave the way to your financial freedom.