Should I pay off my debt or invest?
One of the most common questions I am asked by clients is: ‘should I pay off my debt or invest my surplus cash?’ It is a fair question and there is no right or wrong answer, like so many other questions related to organising your own personal finances. However, there are some key points which are worth considering.
1. What kind of debt are we talking about?
Generally, there are two types of debt – deductible and non deductible. As the name suggests, deductible is debt where we are able to claim a tax deduction for part or all of the interest payments, whereas with non deductible debt we can’t.
The most common type of non deductible debt is a property mortgage, with interest rates anywhere between 4.99% – 6.00% at the moment. Therefore, any capital directed towards your (say) mortgage is providing you with a guaranteed return of 4.99% – 6.00% per annum (based on this example). So the question you should ask yourself is if you decide to invest rather than pay off debt, can you guarantee your investment will return in excess of 4.99% – 6.00%? Or if you have a credit card, potentially 15.00% plus? Of course, there is also the effect of tax and fees but for the sake of this conversation (and getting too technical) I have left this out.
Deductible debt is different because it can provide you with tax relief, depending on your individual taxable income position. Let’s not get confused though – debt is still debt and you are usually going to be better off without it, but some debt (like deductible debt) may in fact be ‘good debt’.
2. What is your investment timeframe?
This is one of the most important questions you need to ask yourself when making any investment decision as it will have a large impact on the level of risk you should be taking. If you have a long-term approach and therefore do not need access to your funds for at least 7 years, then investing in shares and property may be appropriate. And if we take a look at the long term historical average returns for these asset classes, we see healthy figures in excess of 8% per annum.
3. What do you want to achieve now and into the future?
I would stress that each and every one of us considers this question in great detail as the answers will be a key driver in determining your strategic plan. For example, if you wanted to reduce your tax bill at all costs then paying off deductible debt may not necessarily be the right decision. Or if you wanted to achieve the highest, guaranteed, risk-free return available then paying off your non-deductible debt may be more appropriate.
Taking a step back for a moment, all of the above would be irrelevant without one key factor – surplus cash. If I can give you one piece of advice today, it is to do whatever you can to put yourself in a cash-flow positive position, because if you spend more than you earn, it is difficult to achieve anything.
From here, you open a number of doors for yourself in regards to setting yourself on a path which will lead you to achieving all those things you listed when you answered question 3 above.
Chris Giaouris, CFP®
Shadforth Financial Group
Chris Giaouris, CFP®
Chronos Private Wealth
Fitzpatricks Financial, Australian Financial Services Licence (AFSL) 247429. http://www.chronosprivate.com.au/
“I believe financial planning is not solely about investments or strategies, but more importantly, it is about helping people make smart choices with their money so they can focus on things more important than money.”
I have been providing wealth management and holistic financial advice to like-minded clients since 2008. This was initially with a boutique firm called Heraud Harrison who were one of the founding firms that later merged to create the Shadforth Financial Group (SFG). I was fortunate enough to create a number of fantastic relationships with clients and colleagues alike, many of those still being in my life today. But in 2016 I decided to leave SFG to build my own boutique practise which would be (and still is) focussed on a client centric and evidence-based approach.
I co-founded Chronos as I wanted to create a fun and vibrant environment for our staff and clients alike. Sadly, for many Australians, planning for their future is something that either finds its way into the “too hard basket” or gets neglected as everybody is so time poor. My goal is to help clients find their ideal lives, whatever that may look like, whilst at the same time simplifying those things that the world loves to overcomplicate for us. Clearly that involves providing clients with advice but not to be forgotten is also providing clients with education – this is equally important in my view.
I hold a Bachelor of Commerce from Deakin University, am a Certified Financial Planner (CFP®) and member of the Financial Planning Association of Australia. CFP® is an internationally recognised mark and is currently the pre-eminent representation of professional Financial Advisors around the world. I am also a proud member and accredited advisor with the ‘RIAA’ or ‘Responsible Investment Association of Australasia’.
As we all know though, life isn’t just about money! I’m a passionate fan of most sports and love to live an active lifestyle, be that in the gym, on the golf course or futsal pitch. I’m also lucky enough to hear so many amazing travel stories from my clients so as you’d expect the travel bug is regularly spreading through my household. I’m always looking to plan that next adventure!
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