Many people
can be very focused on repaying their home loan in full before they begin
investing.
They are so
averse to debt that they cannot envisage doing anything else until their home
loan is gone.
However,
often this isn’t the best approach to take.
At some
point, investing is more important than debt reduction.
So how do
you know when you have got to the point?
What
factors should you consider?
QUESTION 1: DO YOU HAVE A SUFFICIENT FINANCIAL BUFFER?
A financial
buffer will allow you to continue paying for living expenses and financial
commitments if your financial circumstances change e.g., loss of income.
This buffer
can consist of access to redraw (i.e., additional repayments into a loan that
can be withdrawn in the future, if needed) and/or cash in offset accounts.
How much
buffer you need depends on how secure and predictable your income is, and the
extent of your financial commitments.
If your
income is unpredictable, I would usually like clients to have a buffer equal to
one to two years of expenses and commitments.
If you have
substantial commitments e.g., high gearing to asset and/or high gearing to
income ratios, then it is prudent to hold higher buffers in this situation
i.e., one to two years.
Otherwise,
a buffer equal to 6 to 12 months of expenses and commitments should be enough.
Typically,
your most important financial goal is to accumulate sufficient financial
buffers.
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Jason Gwerder
Wednesday, 18 October 2023
