Uncensored Money: Ask Mel Anything – Pay off the Mortgage or Invest in Super?
Melissa Browne: Ex-Accountant, Ex-Financial Advisor, Ex-Working Till I Drop, Now Serial Entrepreneur & Author, Financial Wellness Advocate, Living a Life by Design | 11/10/2023
In the ‘Ask Mel Anything’ series, Mel answers your questions in the hope you realise you are not alone and that it helps to increase your financial literacy and confidence.
In this Ask Mel Anything episode, Mel answers two questions related to superannuation/retirement funds:
- contribute to super versus paying off the mortgage?
- exchanged traded funds (ETFs) or super?
Resources mentioned in this episode:
- Super Catch-Up Calculator (free download)
If you know you need more help with your finances make sure you join the waitlist for the My Financial Adulting Plan.
If you're not already, come play over at insta at MelBrowne.Money and make sure you are signed up to Mel's Money Musings and Monday Money Moments (yep, we love us some alliteration) for more tips, tricks and ideas on how to best work with your money.
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Welcome. So today is all about me as a solo episode once again, answering questions that you've written in to ask. And today it's a really important one. Today is essentially answering two questions. One is 'superannuation versus paying off your home'. But I think you could add into that or layer that with 'investing or paying off your home'. And the second one is again with superannuation, but being when you're later in your 50s.
So I'm going to read out the questions and then give my take on it. And as always, if you have more questions, hit me up at melbrowne.money on Insta or come, send me an email at hello at melissabrowne.com.au.
So the first question is this,
'Hey Mel, loved your super catch-up worksheet'. So this is a worksheet that you can figure out what the cost of your lost super is and we'll put a link to it in the show notes. 'It was horrifying, but it's good to quantify what a career break part-time work while having young kids meant for my super. Now I'm trying to figure out if I should use cashback that we've paid off our mortgage to boost my super or if over the long run it's better to offset our mortgage while I make regular but much smaller payments into super to try and catch up lost contributions over the next 20 years. Any thoughts? We'll also probably refinance in the next year to do some renovations'.
So essentially the question is pay off your debt, pay off your mortgage, and then invest, or pay off your mortgage and then super? They really are a very similar question. And it's one that I'm asked a lot, where I know that for many people, and I've talked about it before, financial literacy is low. We're so overwhelmed when it comes to what we should be doing. We buy a home and we just become focused on paying off that debt because we hate being subject to it. We hate feeling like it's a noose around our neck. And our thoughts are, you know what? Once that's gone, then I'll think about investing.
And the question here is, should I do that? You know, I've got that mortgage. It's sitting in an offset. Should I now be looking at just investing into super gradually over long term or should I pull that money out which would mean I'd have a mortgage again and put that into super?
And as I said at the beginning, I want you to replace super with simply investing if that's right for you. And as always, the answer is 'it depends' because it depends on your personal circumstances. So you might be someone with a really beautiful, healthy balance in super. where yes, you might've missed a couple of years for kids or a few years for kids, but really your superannuation balance is great. And instead, you might be looking outside super going as this person, I'm not going to retire for 20 years. I don't have any investments outside of super. Maybe what I should be doing is looking at investing instead? And when it comes to that, what I would be suggesting is think about where you are now and where you want to be in 20 years time. Look at what your risk profile is. And again, this is something that you can download online. You can just Google 'risk profile questionnaire' or inside the My Financial Adulting Plan, which you can jump onto the waitlist for, we have a whole three modules worth of investing and we take you through a risk profile and what it means, etc.
But you'd want to think about your risk profile and you want to understand debt because the first thing I want to say is if you pull that money out of your mortgage and decide to start investing with it, you now have debt. If you, if that was sitting in an offset account, you now have a larger debt that's okay debt and I'm going to start investing and my debt's kind of in the wrong place. Versus you might go to the bank and say, I want to put that on my mortgage and then I want a second mortgage and use that to invest. This, the debt pool is going to be exactly the same, but you've attached the debt to the deductible asset, to the asset that's going to go up in value, to the investment, which is the better place for it to be.
And again, this is where I think it's really important to understand investing, to understand debt, to not just do something without thinking through it and understanding all the consequences. Because they can all, there might be a better way for you to do it. And again, this strategy is absolutely not right for everyone. And absolutely it is general advice only. And you want to seek advice for your particular circumstances.
But certainly it's something that we talk about inside the My Financial Adulting Plan is if you wanted to have that growth investment, if you're going to have debt anyway, by pulling that off your, out of your offset account, are you better off to have debt and to look at investing instead?
Of course, the other thing that you may do instead is to simply go, I want to leave that there. I feel comfortable with the mortgage paid off, and then I'm just going to start investing. And again, a couple of things with that.
I always look at the opportunity cost. I'm always going to ask what the opportunity cost is. So if my mortgage is, I'm paying about 6%, but if I know over 30 years, the share market in Australia, for example, is 9.8%. In the US, it's about 11%. In the UK, it's high eights. New Zealand's the same. If I can get a better return somewhere else, is it better to still pay down my mortgage, but not as fast and to use those funds where I can get a better return? Meaning that in 20 years time, thanks to the power of compound interest, I'm then building up that snowball faster.
Of course, there will be some people who are like, you know what, I just want the sleep-at-night factor of that mortgage paid down. I understand the opportunity cost is I'm potentially going to be a hundred thousand dollars or more worse off if I don't do that. But the sleep-at-night factor is so important to me that I'd rather just start investing now. And I'm okay with that. Again, this is where I think finance is personal and it's really about understanding the right approach for you, but ultimately deciding to do something.
Now, as to whether that should be superannuation, again, the question is knowing that you've got another 20 years till you retire if you don't have any investments outside of super, is that the right place for all of that cash, or do you go, you know what? I'm going to split it. I'm going to start doing some investing outside of super, and I'm going to do some investing in. Yeah. And you might look to exactly that same conversation I just had around opportunity cost and go, you know what? I can catch up on that super, the tax office will allow me to catch up on the super that I might've paid. So I want to make some lump sum payments into super. But I'm not going to put all I could have, because it's really important to me that I'm also investing outside of super so I've got a choice here as well. So the answer is, you definitely could withdraw some of that from your offset and put it into super. You could just start now, or you might look at investing outside super now or investing outside and inside super.
As to whether you would use that money in the offset or not is really up to what your risk profile is, as to what your preference is, and what your appetite for debt, et cetera, is.
But I want you to really consider the opportunity cost and to think about if it's just sitting in that mortgage, what's the opportunity cost if I were to put that somewhere else where I could be earning a higher rate of return? I still am paying off my mortgage. I'm still even paying that at a higher rate. I'm still even paying that But I'm also investing.
And for me, I really don't like 'or'. I don't like people saying yeah, I'd rather do this AND then I'll do that. Or do you want to pay off your mortgage or invest? Let's do both. And for many of us, that is absolutely the right approach to be doing both, to be paying off our mortgage and investing. And if this person has been paying off their mortgage up to now and thinking that's the right approach and now going, Oh, maybe I should be doing more than just paying off the mortgage. Then sure. Grabbing some of that offset and either investing outside of super or catching up inside super could be a perfect thing to do with that. Just be aware that you've still got buffers. And this is where goals is really important to look at. What do I want to do in the next few years? What liquid cash have I got coming up that I might need that money for because I can't grab it out of superannuation or retirement funds. And I don't want to break an investment. So just say you had a hundred thousand dollars cash sitting in your offset that you might decide to still leave some in there for your emergency funds and your buffer or short-term goals coming up, but then decide to grab the rest and do something with that, whether that's super or investing or a combo of both, or it might be reducing that mortgage down, getting a second loan and using that to invest. So many options.
The second question is around a really, really similar question, which is why I wanted to group these two together. And that was 'exchange-traded funds or super? So this is a female, early fifties, currently married with two kids still at school, recently had emergency spinal surgeries, previously stay-at-home mom and part-time work. Now not likely to be in a position to take up full-time work. Next to no super, spouse has threatened to take his money and leave. Some difficult strategic thinking needed should any additional funds go to super or to exchange traded funds?'
So I want to talk to this whole, 'I'm going to take my money and leave'. That's a version of financial abuse. You know, that's financial control saying, if you don't, if you don't behave, this is what I'm going to do. And let me just say, it's not necessarily and probably 'his' money to take and leave. So let's just call BS on that from the get go.
So I'm going to give you advice that you didn't search for or ask for. And that is, I think you need to speak to a great family lawyer because you need to understand your rights in this. Because that way, if he's saying to you, I'm going to pick up my money and leave, I want you to have that knowledge around, well, actually buddy, and you may never say it, but you can think to yourself, actually, I know what my rights are in this. And I know what you're able to do, and I know what you're not able to do. And that way, I would speak to the family lawyer first, and then you can start to invest or to contribute to super based on what your family lawyer has said to you and what you feel comfortable with after that discussion.
Because here's the thing, chances are you're entitled to part of his super. But we don't want to just rely on that. But also, if you are looking at a split, chances are you might need some money. You might need access to cash and you might need access to liquid funds. So I want you to have a think about that and think about how stable your relationship is and how much funds you need.
And then again, like my first question, you might decide it doesn't have to be an ETF OR super. It might be both. You might go, you know what, I need to look after current me and I want to look after future me. So if I've got X amount to invest every month, I might split it. I might split it equally, I might split it 80/20, I might split it 90/10, but I'm going to split it so that I've got some money happening and I've got some financial independence happening outside of super so I have choice. But I also have extra money going into super as well.
I'd also catch your spouse at a good time, especially if he's a high-income earner. And I think people get really appealed to when it comes to tax savings. So if you're still a stay-at-home mum, you might go to the accountant with him when he's doing his tax next, just take an interest. And while you're there say, Hey, you know, I've heard of this rebate thing with superannuation where if you contribute to my super, you get a tax saving. How good would that be? People love money back on their tax. So maybe introduce that as an option. Also be aware of and look for advice around the co-contribution. So in Australia, if you're a low-income earner, the government might match all or part of your contribution that you've made up to a certain amount. It used to be a thousand dollars. So again, that might be something that you talk to your partner and say, Hey, I mean, this is basically free money. We should totally take advantage of that. And if he refuses or doesn't want to do that with you, you might decide, you know what, as a way of boosting my super, I'm going to take advantage of all the free money I possibly can to build that up as well as looking at investing outside.
But the thing that I really want you to do is to also seek advice from a great family lawyer because whether or not you choose to split, every time he threatens to take his money and leave, I want you to understand, well, actually, what does that really mean for me? And what does that mean for me when it comes to investing and contributing to my super as a result? And to understand as well that's simply not acceptable behavior. And maybe at a time when things are calm for you, to sit down and say, I'm curious as to why you'd say that because that seems like a really mean-spirited thing to say. So can we have a conversation around why that is? You know, my husband and I when we proposed to one another. We made a rule that we would never ever, doesn't matter if it's in the heat of the moment, anything, the D word simply is not a word that's allowed to come out of our mouth. We are never allowed to threaten to leave the other, to divorce, to whatever. Like we said from the get go that will never come out of our lips. It's not a fight. You know, it's just simply not acceptable to us. So for you, he might not think that this is a big deal to say this. This might just be his, you know, she's really upset me and I really want to hurt her. And this is how I know I can get under her skin. So maybe it is a conversation. If you do have a great relationship other than this comment, which is not an acceptable comment, maybe it's a conversation around, I think you just really wanted to hurt me, but can we have a conversation around that phrase, particularly and how, what that means for me? And then can we have a conversation about finances and money? Cause you really, by saying it have brought up something that I feel really uncomfortable and maybe a little bit rocky with so I'd like to together understand how we can build that up for me. Maybe it's an opportunity for you to have that conversation together. It may not be. But for some people that are listening, it might be for you. It might absolutely not be, which is why the family lawyer discussion may be the thing that you do before all else.