If you’re paying off your home loan but you also understand the importance of building up your super, you may find yourself trying to balance your present needs with those you’ll have in your future.
So how can you balance the short and long terms and give yourself the best of both worlds?
Depending on your age, it can be wise to channel as much money as possible into superannuation. That’s because it’s one of the most tax-effective ways to save—you ultimately end up with more in your pocket as less goes to the tax man.
And say you plan to retire in 10 or more years, with more money in super you have the potential to benefit from compound interest and dollar-cost averaging: two of the most powerful ways to build long-term wealth.
When it comes to property, you generally have to use after-tax dollars to repay your home loan. But in super you can deposit pre-tax dollars, often with minimal or no impact on your take-home pay packet.
By using salary sacrifice you can also contribute money into super (although there’s a limit on how much you can deposit each year) which means less tax is applied to your income so it’s likely you’ll lower your overall tax bill each year as well.
Buying a home can be important too. Although research shows it’s becoming less important than it used to be. Because as property prices rise, many people are finding property is becoming less accessible, driving significant change in the Australian way of life.
Where property ownership used to be a given, a recent survey project called the Household, Income and Labour Dynamics shows a significant reduction in home ownership rates with less than 50% of Australians owning their own homes by 2017.
One of the predicted effects of this all-time-low rate of home ownership is a skew towards superannuation for long-term wealth accumulation. And while super is readily accessible as an investment (although you usually have to wait until retirement to access your money) it’s also attractive because it doesn’t present the high entry costs that property comes with.
However, while adding money to super has many advantages, if you are have already paying off a home then this can be a good thing too—depending on how long you have before retirement, you can end up building enough capital growth to help you in retirement. By putting extra into your home loan, you’ll also pay less in interest charges as the principal amount owed on your home loan decreases.
We also generally expect the value of most homes to rise over time, therefore the more you repay, the more equity you may be able to build.
So what if you’ve got some extra cash—how do you prioritise?
There’s no blanket answer to this question. The way you prioritise will be unique for you depending on your own circumstances, your current super balance, income, needs and goals.
That’s where financial advice can make a big difference. Start a conversation with us and we can help make sure you will be comfortable and have everything you need in retirement—and help you into the property market if that turns out to be the best option for you. You may not need to choose one option over the other. You may be able to have the best of both worlds.
You need to consider with your financial planner (or adviser), your objectives, financial situation and your particular needs prior to making an investment decision. Sensibly Pty Ltd and its authorised representatives (or credit representatives) do not accept liability for any errors or omissions of information supplied on this website
Nick Shanley, Steve May, Luke Styles and Shanley Financial Planning T/A Steve May Financial Services are Authorised Representatives / Corporate Authorised Representative of Sensibly Pty Ltd, AFSL 533923. Please refer to our website at www.stevemayfs.com.au to reference our Financial Services Guides.
Shanley Financial Planning Pty Ltd trading as Steve May Financial Services (ABN 19 612 825 180) is a Corporate Authorised Representative of (1265706) of Sensibly Pty Ltd (AFSL 533923)
Nick Shanley, Steve May and Luke Styles are Authorised Representatives of Sensibly Pty Ltd (AFSL 533923)