When you have a lump sum of cash in hand, and you are unsure what to do with it – it is considered one of those financial issues that people don’t mind. You can either use the massive chunk of money to pay off your mortgage or put it into investment security. The first option will save you a lot of money in the future on your home loan. In contrast, the second option will provide you with an opportunity to build on the money even further through the returns on investments. When you start investing early, your retirement period becomes easier to deal with. But when you choose to pay off the mortgage, it makes your current existence easier. We will help you decide what sounds like a better plan!
Everything you need to consider before choosing to invest or repay
Emergency savings
An individual must always have an emergency fund/savings at all times during their life. The emergency savings help in funding your sudden emergency financial needs, which can range from a broken appliance, a car accident to losing your job altogether. It is always advised to keep at least three to six months of your salary as emergency savings so that you can instantly access those funds when needed. So, as soon as you get a considerable sum of money into your account, set aside a part of it as your emergency savings.
Other debts
Any other debts that you may have, from student loans to credit card overdrafts, play an essential role in deciding how you will use the money. If you have several other loans in hand, the interest you pay for these loans will be more than the interest you save by paying off the mortgage. It might also overpower the return on investments you would get from investing. Hence, it is advised to repay these debts as a priority as that would ultimately boost your finances.
Paying into your pension
If you are not already accumulating some part of your salary as your pension, you should. Pension schemes benefit you with tax relief, and several workspace schemes enable your employer to contribute to it as well, making it a cost-effective way to save up for retirement. This is also a form of investment, and hence you should consider it a priority whenever you have a large sum of money in hand because a secured present comes from a secured future.
Advantages of investing the money early
Whenever you have extra cash that you wish to invest in shares, debentures, real estate, or any other security, it is most likely that the money will grow in the long term. Especially if you keep the money lying in your savings account, it will not grow as much as it will when you invest it. Investing money for at least five years in the stock market can reap you profits that no other security promises, and the period of time can be extended to as much as you want to. The more money you invest, the more money you make, the more money you have – it is almost like you use the money to make more money!
Investing the money also keeps your access to the funds intact in case of any emergency. Mutual funds, shares, and even debentures can be sold in a click to give you the funds back when needed.
Advantages of paying off the mortgage early
Using your savings to pay off the mortgage at once reduces your monthly outgoing as you no longer pay a part of your salary into your mortgage. This leaves you with more cash that you can spend or save or invest. When you pay your debts quicker, you reduce the overall interest bill, leading to less expenditure. Suppose you take the wise decision of paying off your mortgage at once, provided you do not have any other debt in hand and are already contributing to your pension fund. In that case, you will be saving a lot of future monthly expenditure.
So, should you invest or pay off the mortgage?
The exact answer to this depends on your financial circumstances and goals. It also depends on what you prioritise at the moment. If you dream of being mortgage-free and cancel the chance of paying it every month, you might take an emotional decision to pay it altogether. However, you might be okay to spend some part of your salary every month as mortgage repayment but wish to explore the stock market to grow your money further. In the latter option, if you choose to invest the money to make more money out of it. As long as your overall finances are in good shape, both options are sensible and can be chosen as per your own current needs and requirements.
Want to speak with a specialist about your money? Request an invitation from us at Expat Wealth Adviser and we can put you in touch with the right person for you.
[…] The last thing to consider when devising a retirement plan is the level of cash you currently have. If you have a considerable amount of cash sitting idle, it is best advised to invest it in tangible assets that increase in value as inflation rises. Hard cash alone depreciates in value as inflation increases due to the loss in purchasing power. Consider the type of investment that suits you best to understand which real assets suit you best, or take the help of a specialist wealth manage. If you are someone who prefers income-generating investments, a blend of different mutual assets, equities, and bonds may be the right choice for you. However, if your focus is on capital growth, you can consider real estate as an asset class. […]