Pay Off the House or Invest in Shares?
One of the most commonly asked questions I get is whether to pay off the house or invest in shares. Here is my advice.
Dear Barefoot,I’m 38, married, with two kids. We bought our home six years ago and owe about $330,000 on it, and it’s worth around $475,000. I’ve just got a promotion at work, so I was thinking I’d like to invest in either some shares or maybe even an investment property to save on tax. Although my wife isn’t too keen, we thought we’d ask you. What’s your advice?
Tim, Sydney
Hi Tim,
I get this questions a lot – and mostly from men.
Making money motivates most blokes, whereas most women are driven by security (which explains why a former scammer once told me his golden rule for manipulating people was ‘don’t pitch the bitch’).
Women therefore tend to be much more levelheaded, and prefer to have a good handle on their most important asset – the family home – before chasing other investments.
How do you get around this?
Well, you could bust out a whiteboard and explain to your wife that shares historically outperform all other asset classes, and that a conservatively geared share portfolio (which I have built throughout my working life), or perhaps even an investment property would be an asset base worth diversifying into over the long term.
But life doesn’t happen on charts.
If you’re paying 7.5 per cent on your home loan, you’ll need to generate a better return than that to make it worth your while. Yes, there are tax benefits from negatively gearing, but you should never invest solely for tax benefits. And you need to keep your eye on the after-tax return – 7.5 per cent (guaranteed) is hard to come by – especially in residential property. (That’s why I’m a big fan of fully franked, dividend paying, shares).
Here’s what I’d do:
First, I’d talk to your wife and get her opinion (happy wife, happy life).
Second, I’d make sure I had at least three months of living expenses stashed away in a high-interest online savings account or a mortgage offset account. Why so much? Well, we are truly lucky to live in the best country on earth and we pay a hefty price for it. Research out this week from The Economist shows Australia is one of the most expensive places to live. Having some Mojo money is a smart strategy for sound sleep – and isn’t that money’s greatest gift?
Third, I would absolutely invest some of your bonus (after you’ve whacked a bit off your mortgage), by salary sacrificing a set amount into a low-cost superannuation fund that has a portfolio of quality Australian and international shares. Your super contributions are taxed at just 15 per cent, as are your earnings, and capital gains are taxed at 10 per cent (just watch your contribution caps).
Paying down your debts, building up your super, and having a buffer for tough times makes such good sense that it’s exactly how I manage my own money – and I’m not even married (yet).
Tread Your Own Path!
Scott
