One of the most common financial dilemmas faced by Australian investors is how to allocate surplus cashflow. When you have extra funds to spare, should you make additional super contributions to boost your retirement savings? Or should you use the money to pay down your mortgage and reduce your debt? In this article, we explore the pros and cons of both options to help you make an informed decision about your investment strategy.

Super Contributions

Depending on your financial goals, using your surplus cashflow on additional super contributions can be a smart investment strategy for you. Benefits include:

  • Made with pre-tax dollars, which means you pay less tax on your contributions
  • May be tax deductible, depending on your income and contribution type
  • Earnings potentially grow faster over time due to the power of compounding

Before committing to this investment strategy, it’s important to recognise the risks involved. These include:

  • Money is locked away until retirement or until you meet other conditions
  • Potential for investment losses, as superannuation is an investment product
  • May not be suitable for everyone, especially those with immediate financial needs

Mortgage Repayments

Allocating more of your cashflow to additional mortgage repayments can reduce your debt and provide more financial stability. The benefits include:

  • Made with after-tax dollars, but you can claim interest payments as a tax deduction
  • Reduces your mortgage debt, which can save you money on interest over time
  • Provides greater flexibility to access funds, as you can usually redraw from your offset account or redraw facility
  • Can help you achieve homeownership sooner

The drawbacks of investing more money into additional mortgage repayments include:

  • No tax benefits for additional repayments themselves
  • Net investment earnings are typically lower than potential superannuation returns
  • May not be the best option for those with a long-term investment horizon, as superannuation offers potential for higher returns

Other Factors To Consider

Age and Long-Term Planning

Younger individuals may lean towards superannuation for long-term growth, while older individuals might prioritise mortgage repayment to reduce debt before retirement.

Risk Tolerance and Investment Choices

Assess your comfort with risk; if you prefer security, reducing debt might be the right choice, whereas those open to risk might opt for higher potential returns in superannuation.

Debt Levels and Priority Payments

High-interest debts should be settled first before considering additional contributions or repayments.

Aligning with Financial Goals

Tailor your choice to your goals; saving for a home might favour mortgage repayment, while building a retirement fund aligns with superannuation contributions.

Still Unsure?

The decision between allocating your excess cash flow to superannuation or mortgage repayments is complex and depends on your financial goals. There are merits to both investment strategies, and they can be fully optimised for your specific circumstances by consulting a financial advisor.

To Conclude

When it comes to finance and smart investment strategies, there is no one-size-fits-all solution, so it can be difficult to determine which is the better option for you. However, by understanding the pros and cons of additional superannuation or mortgage contributions, you can make informed decisions that works the best for you.

Ready to make the right choice for your financial future? Book a call with us today and embark on your journey toward financial freedom.