Why is investing more generally effective than debt reduction

Once you (1) have sufficient buffers in place, (2) are on track to reduce debt by a sufficient level by the time you retire, and (3) if your cash flow is not sensitive to interest rates, then it’s likely that investing in growth assets (investments) is more important than making additional loan repayments.

Often, we meet people that have few investment assets, other than superannuation, that have (for example) spent the past 5 years repaying their $350,000 home loan to zero.

We think this is a waste – a missed opportunity.

In many cases, it is likely that they would have easily repaid their home loan by the time they retired, as their debt was relatively immaterial.

As such, they would have been much better off beginning investing 5 years ago (e.g., the international share index has returned 11.5% p.a. over the past 5 years) and taking longer to repay their home loan.

We discussed why investing is likely to generate more wealth than repaying your home loan.

In short, this is because it is likely that the after-tax percentage return from investing in shares or property will be more than the home loan interest rate, on average, over the long run.

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Jason Gwerder
Friday, 27 October 2023

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