Should you be in a position to, you might find yourself asking “What should I do with any spare income I have”? While there are many options available, some, such as taking a holiday or buying yourself new clothes, gadgets or a car are great for your enjoyment; you might want to consider making some moves for your financial future
Assuming you want to use some of your spare income to better your financial position there are typically three primary options, outlined below, we feel you should consider.
Pay down your mortgage –
This is perhaps the simplest of the three options. With this strategy, you can use your extra income to increase the amount you pay-off with your mortgage repayments. The benefits of this strategy include:
- You will pay-off your debt quicker
- You will save on interest costs
- You may retain access to the funds via a redraw facility should they be required in an emergency
The downside of this strategy, however, is that it does not provide you with capital returns.
Add funds to your superannuation –
This involves contributing the surplus cash flow to superannuation; advantages can include the following:
- You may be able to claim a tax deduction for the contributions. Depending on your marginal tax rate this could save you up to 34% tax.
- A contribution may entitle you to the Government’s Co Contribution scheme depending on your income.
- The funds can be invested inside superannuation where tax on income and capital growth is capped at 15%.
- Your funds will benefit from compound earnings that may be higher than what you would save in interest by paying down a mortgage.
However, if you look to proceed with contributing to your superannuation, you should be aware that superannuation has access restrictions and may not be accessible should you need the funds for an emergency. Furthermore, depending on your investment choices, there is no guarantee on the return you will achieve.
Start an investment savings plan –
This strategy involves setting up a regular contribution to an investment which can have the following benefits:
- Your funds will benefit from compound earnings that may be higher than what you would save in interest by paying down your loan
- You will retain access to the funds in the event they are required at a later date
As with anything, there are a couple of disadvantages with an investment plan. These include:
- Any income will be taxable in your name and will be taxed at your marginal tax rate.
- Depending on your investment choices, there is no guarantee on the rate of return.
Which option is best for you depends on a number of factors including your age, your marginal tax rate, your mortgage interest rate, the rate of return of any investment (both super and personal), your eligibility to contribute to super and whether you require access to the funds and when. Before you make a decision, you should speak with your financial adviser to ensure your chosen strategy is right for you.