You’ve got the investment bug! Your plan for getting mortgage and financially free is coming together and now you’re wondering what’s the best way to invest your seed capital (savings used to grow your wealth). The share markets are tempting options, but before you dive in, check out these 04 reasons you should pay off your mortgage first.
Before we start let’s get clear on three points:
- KiwiSaver shouldn’t wait. You should already be contributing at least 3% to KiwiSaver, and you should continue to do so. Talk to your investments adviser to discuss if your contribution rate is right for your financial stage and goals.
- At Futurebound, we take a financially responsible approach to wealth building. That means we don’t advocate for high-risk strategies that are going to put you at financial risk and potentially cost you your livelihood. We believe it’s the right thing to do, despite that it costs us to do so.
- There are other advisers and commentators that disagree with these 04 reasons to wait until you’ve paid off your mortgage to invest in the share market, but you’ll find that they probably benefit financially from telling to invest in the share market sooner.
Now that we’re on the same page, let’s get to it!
Reason #01 – Risk
If you take 30 years to pay off your mortgage and focus on investing in the share market, you are making one really huge assumption that your life is going to go to plan and you’ll experience no tragedy.
Carrying a large mortgage over time may not seem that risky if you think you’ll always be able to work and that your income will always be as you expect. You’re assuming that everything will always go great for your partner as well.
Unfortunately, these assumptions aren’t based on reality. You’re likely to have some sort of tragedy or unexpected event throughout your working life that impacts your ability to meet all your financial needs and wants.
Paying off your mortgage as fast as possible reduces your risk of financial ruin in this event. The only guarantee in life is that your life will not go to plan and you should expect the unexpected.
Reason #02 – Cashflow
Have you thought about how much more money you’d have in your pocket and to invest when you don’t have a mortgage to pay.
Most households are paying between $30k and $50k per year on mortgage repayments. That’s a lot of money!
Once you’ve paid off your mortgage, your usable income increases a lot and this gives you more options.
Reason #03 – Control
You can’t control what return you’ll get in the share market, but you can control how much debt you have. Paying off your mortgage faster is something that you can do regardless of the world economy, share prices or other variables.
Paying your mortgage off faster is up to you. Success in the share market for you is up to others.
Reason #04 – Favourable financial position
If you have less debt this means that banks will look on you more favourably in the event you want to invest in property. Your owner-occupied house is likely to be the asset that has gone up the most in value, so if one property has already been a good earner for you then two properties will be an even better earner.
In order to leverage against the equity that you already have and grow your wealth through property, less debt needs to be your friend.
Once you’ve paid off your owner-occupied mortgage, you’ll find that you’re able to turbo boost your investments to grow your wealth.
Keep in mind this article is providing general information and not individual financial advice. If you’d like a review of your situation and customized advice for building wealth to reach financial freedom and live a fulfilling life, please book a free 15-min chat.