Having spare cash might seem impossible right now, but one day it will happen.
It could be a one-off event — selling something you own, a tax refund or a bonus from work. It may even be an ongoing change, perhaps from a pay rise or job change.
Once you've paid down any (high interest/fees) consumer debt, got your savings buffer in place, and hopefully managed to sidestep your brain's biochemical urge to spend, what is the best thing to do with it?
This often comes down to a three-way choice:
- Put the cash into the mortgage on your home
- Superannuation (super)
- Investments outside super
There's no one-size-fits-all answer, and you can choose more than one option. You can do all three if you want.
Here are some questions to help work out what might suit you.
First, the maths
Which is more beneficial from a numbers-only perspective?
This depends on whether income tax applies to the extra cash because, if it does, contributing to super may mean you get to keep more of it. And the more capital you keep, the better.
Let's say the original source is $1,000 earned before income tax is paid. If you meet the conditions to make a voluntary contribution at the standard 15 per cent tax rate, putting that $1,000 into super means you keep $850.
If you're paying income tax on that $1,000 and ignoring Medicare levies, in the 2024-25 financial year you're left with:
- $840 in the 16-cent bracket — $10 less versus super,
- $700 in the 30-cent bracket — $150 less,
- $630 in the 37-cent bracket — $220 less, and
- $550 in the 45-cent bracket — $300 less.
This can make super an attractive option over a mortgage or investing with post-tax money. And the higher your top tax bracket, the bigger the potential benefit.
Next in the maths line of thinking: where can you get the biggest returns so that extra cash proliferates?
Looking at long-term historical trends, returns on investing inside or outside super tend to beat the interest you save on your mortgage.
For example, at the time of writing:
- Interest saved via mortgage: about 6 per cent per annum (a reasonable long-term average interest rate for Australia)
- Return on super: about 8 per cent per annum (average from 1993 to 2024 at Super Guide)
- Return on Australian shares (common investing example): about 9 per cent per annum on average, according to Morningstar analysis of the last 30 years.
So, you might hope to be 2 to 3 per cent ahead each year on average if you invest instead of putting it against the mortgage, remembering that share and super returns vary year to year, and shares in particular are subject to short term stock market volatility.
The compounding effect of that small margin can add up to tens or hundreds of thousands of dollars' difference over your lifetime.
But that's not the whole story.
The bigger piece of this puzzle is what works for you.
Your priorities and preferences can be more important than the numbers, such as:
Once you put the money into super, options for getting it out before you retire are limited. If you think you'd like that cash on hand, for example as a house deposit, super is a less attractive option unless you're using the First Home Super Saver Scheme (FHSSS) or similar.
Investing outside super means the cash is more accessible, but Murphy's Law says you'll need it just when the price of your investment drops, so you lose money.
If Murphy's Law doesn't strike and you sell for a profit — the best-case scenario — capital gains tax may apply, making the potential benefit less worthy of the risk.
In general, if you want access to that cash again in the short term, keeping it in an offset account against your mortgage is worth considering.
Failing that, you could make extra payments on your mortgage to have available as redraw. Keep in mind that once it's paid into the mortgage, it's technically the bank's money — at least one Australian bank absorbed redraw balances into loans so the cash was no longer available for home owners.
No home loan? An interest-bearing savings account or term deposit might be preferable.
The interest saved may be numerically less than historical returns from investing, but interest is guaranteed. Returns are not. Some people prefer to address the debt first because it is inescapable.
Others simply don't sleep well at night knowing debt is hanging over their heads, no matter what the numbers say.
From a stress reduction perspective, prioritising the mortgage may be more sensible than any form of investing and have flow-on effects that outweigh the superficial maths.
Investing outside super has distinct advantages for young people especially as you can access any income generated (e.g. dividends, rent or coupons) while you're working. You can also sell the asset if you want to access the capital. Sometimes that level of control outweighs the tax benefits of super.
It also means you're responsible for investing. If the thought of learning how to invest well then manage those investments doesn't thrill you, perhaps something lower touch like your mortgage or super appeals.
You can engage a financial adviser to help you invest instead, and it may be a good idea if you're not confident flying solo. But you'll still need to stay across what they're doing, so you'll need to spend time understanding what they've advised.
They can also be very expensive, and with options like Exchange Traded Funds (ETFs) easily accessible these days, you could achieve a diversified investment portfolio without formal advice.
This is why they call it personal finance; there are few absolute right or wrong answers, only what works for you.
Thankfully all three options are likely to put you in a better financial position. Whether you choose your mortgage, super or investing — or a combination thereof — you're off to a good start.
Lacey Filipich is a financial educator and the author of Money School.
This article contains general information only. You should consider obtaining independent professional advice in relation to your particular circumstances.
