$1 million investing mistake too many Aussies make

Australians may think they’re doing the best thing by paying off their mortgage early but there is a big flaw in that plan.

With interest rates at multi-decade highs, putting your savings to work in your mortgage is an immediate pressure release – but the reality is that it could be costing you a lot more than you realise.

For example, saving $200 per week on your mortgage over 30 years will save you total interest of $558,580. But if you were to invest this money instead, assuming the average sharemarket return of 9.8 per cent, the pay off could be $1,565,488 – meaning you’d be more than $1 million ahead if you were to invest instead of just paying down debt.

The right move here will make a serious difference to your bottom line.

Differences seem small at first

One of the biggest factors that drives people to make the wrong decision here is the fact that in the short term, the difference between making extra repayments on your mortgage compared to investing are (very) small.

For example, one year of making $200 weekly in extra mortgage payments would save you interest of $290, compared to investing which would make you $480. After three years, the mortgage has you $2891 better off compared to $4901 investing.

But the work done in these early years then compounds over time, so that after years five, 10, and 20 the difference between saving vs. investing is $6292 ($8467 vs. $14,759), $33,484 ($38,029 vs. $71,513), and $240,867 ($192,435 vs. $433,302) respectively.

The difference starts escalating, slowly at first but then accelerates.

For most people, when they’re deciding what they’ll do with their money, the focus is on the short term; what will happen next month, over the next six months, and the next year. But when you focus only on the short term, you end up blinded to the bigger benefits you can access over time.

Paying down a mortgage can feel like the right thing to do but it may not pay off in the long run. Picture: iStock

But where do you invest?

There are a lot of different ways to be right when you invest, and if you spoke to a handful of different investing experts you’d probably get a heap of different suggestions. But the statistics can’t lie, and the stats show that index funds are the best performing investment more than 90 per cent of the time.

This means that by using an index fund for your investing, more than nine out of 10 times you’re going to be better off. Index funds in my opinion have the huge added benefit of the fact that because these funds are investing into every single company in the sharemarket, the only way they can go to zero is if every single company in the country goes belly up at the same time – and I can tell you that if that happens, we’re all going to have much bigger problems than your investment portfolio.

You could be better off if you were to invest instead of just paying down debt. Picture: NCA NewsWire / Gaye Gerard

Index fund investing should give you a heap of confidence to get started, and to keep going. The fear of making a costly mistake holds so many people back from investing, so the value of this confidence shouldn’t be underestimated.

How do you make this happen?

The first step here is to take the time to map out your spending and saving plan, or budget. Look at what money you have coming in and what’s going out, and from there assess the opportunities for saving.

Pro tip here, don’t forget about increasing your income – this is an often overlooked lever that can help you save more without making more sacrifices. Particularly in today’s cost-of-living crisis, this can be an important driver of your results.

Once you’re clear on your savings number, take the time to map out what it would look like if you were to make extra mortgage payments compared to what it would look like if you were to invest the money instead.

Look at the short term results, but make sure you look over the medium and longer term to see the true impact of the decision you’re about to make. From there, you need to take action.

It’s really common when people are working through decisions like this one that they get pumped up when they’re deciding, but then life gets in the way.

I can tell you from experience that the best ideas and best plans will come to absolutely nothing if you don’t actually make them happen.

The wrap

The conventional wisdom around money is often wrong. People talk in absolute terms about how paying off your mortgage is ‘good’, or how investing is ‘risky’, but in reality it’s the timing of these moves that dictate how good they really are for you.

Instead of listening to anecdotes and this wisdom, instead take the time to understand your numbers and make the choice that will work best for you.

Ben Nash is a personal finance and investing expert commentator, financial adviser and founder of Pivot Wealth. He is the Author of ‘Replace your salary by Investing’ and Get Unstuck, and runs regular free online money education events, you can check out all the details and book your place here

Disclaimer: The information contained in this article is general in nature and does not take into account your personal objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your circumstances before acting on it, and where appropriate, seek professional advice from a finance professional.