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SPARE CASH IS LIKE WINE, THERE’S RARELY ANY SPARE..

by Ross Greenwood
23 August 2021

1. SPARE CASH IS LIKE WINE, THERE’S RARELY ANY SPARE

One of the dilemmas for any person or family is what to do with spare cash (though many would argue that, like wine, there is rarely any spare). 

But if you are broadly following a financial plan and setting some money aside for future disasters (how quickly do tyres need to be replaced?) then there should be, in time, an accumulation of savings. That’s what this is all about, right?

2. ITS YOUR CHOICE

Once you have a few dollars accumulated, then comes choice. You need to choose what to do with that money. As we have pointed out many times, leaving money in the bank is counter-productive because rates are so low and you will pay tax on any earnings.

So what of these choices? It boils down to two basic things, on which your circumstances are important. Can you afford to put the money away for a longer term, semi permanently if you like, or do you need the cash on hand (say you might be saving for a deposit for a new house or car, in which cash you need to be able to access it quickly)?

3. WHAT’S BEST? PAY DOWN DEBT OR INVEST?

Then comes another factor: do you make a better return by investing the money; or by using the money to pay down debt? This brings us to the old investing in super or paying off your house debate.

4. WHAT’S BEST? PAY DOWN DEBT OR INVEST?

Then comes another factor: do you make a better return by investing the money; or by using the money to pay down debt? This brings us to the old investing in super or paying off your house debate.

5. ITS SIMPLE MATHS

Having trouble following? OK – here’s the maths. Because our person’s tax rate is 32.5%, and they repay the 18% with after tax dollars … it’s only 67.5% of the pre-tax return … 26.6%. Even if you don’t get the maths … bottom line is this: you are about 30 times better off using spare cash to pay off a credit card debt than you are keeping the credit card debt and leaving the money in your bank account. Simple.

6. THEN, PAY YOUR MORTGAGE DOWN

Next, if you’ve paid off the credit card, what next? If you have a home loan, should you use the money for that? Technically, yes, because you can also use a redraw account, or mortgage offset facility (check your home loan to see if you have one of these) which lets you have access to your money but saves you the interest you would otherwise pay on the loan.

If your loan is now even as low as 2.25% (and remember our credit card example) paying down that mortgage for a person earning $100,000 a year is like finding an investment account that pays 3.3 percent. You can argue the saving here is less – certainly much less than the credit card comparison – but it’s at least three times better than if you left the money in your savings account.

7. THE SUPER TRAP DEBATE

Now comes the debate about paying off your home loan or putting more money into your super fund. 

With super, remember the return, after tax, has been 6.8 percent a year for the average balanced super fund for the past 15 years (it was 18% in the stellar year to June 30, 2021, which bumps up the average). In the 29 years since compulsory superannuation was introduced, there have been only four years where growth funds went backwards.

So super is a great place to keep your money. The problem is that once you have put the money in there (even after-tax savings – called non-concessionary contributions) must stay in your account until you reach your theoretical retirement age (over 65 for most). So you might get a great return, but you can’t get access to your cash.

This is the classic example where doing the financially correct thing might not be the right choice for your lifestyle.

8. ONE LAST POINT

Remember the aim of your working life is to enter retirement with your home fully paid off (most peoples’ incomes in retirement are insufficient to keep paying mortgages). The quicker you do that, the more choices you will have with your savings.

Wondering whether to invest or pay down your debt?

To find out more, connect with one of our expert consultants. It’s a fee-free, no obligation chat.