The best ways to spend your surplus cash

For Vince Scully, there are three ways you can spend your surplus cash – invest, grow your superannuation or pay off your home loans and debts, as long as it doesn’t disrupt your goals.

Through and following the pandemic, governments are providing tax relief and support in the hope that it will help re-boot the economy. You may also find yourself in a position where, through other fortunes and successes (or maybe a bit of luck), there’s more cash sitting in your bank account than you planned for.

So what’s the best way to make the most of it?

If there’s one thing veteran financial adviser and author Vince Scully knows, it’s how to live your ideal life with the money you have.

Vince told KnowHow founder Bushy Martin on the Get Invested podcast that spending surplus cash will be different for everyone, with each option providing varying levels of flexibility and financial advantages.

“Over your life, sticking it in your super (fund) is going to give you the best mathematical answer. You get a tax deduction for putting it in, you pay less tax while it’s growing and you get it out tax free when you retire. The downside of that is you give up flexibility, you take on some regulatory risk and you lose the ability to access it before retirement,” Vince said.

“The next thing you can do is you could invest it. And again, mathematically, that will give you a better answer than paying off your home loan, even when home loan rates were 15 plus.

“If you go back over any ten year period in history, you will find that the return on investing, after fees and after tax, is higher than paying off your home loan. But to do that, you are giving up some flexibility and you’re giving up access to the cash.”

For those choosing to invest, Vince advised four key things that investors need to look at. These include transparency and understanding what you’re buying, structure, fees and asset allocations that align with your risk profile, time horizon and ability to recover.

However, if you’re unsure on whether or not to prioritise paying off your home loans and debts, Vince suggested to look at how much you owe.

“For most people, I would start with the ‘how big is your home loan?’ discussion. If you owe a very large percentage of the value of your property (certainly 80%+) or your home loan payments are a large proportion of your income, you should focus, first of all, on repaying your home loan, despite the fact that it will give you a lower overall return,” he said.

“It’s gaining you flexibility, it’s gaining you a buffer against the unexpected, and it gives you peace of mind.”

Besides mortgages, Vince also explained the three categories of debts and which ones you should tackle first.

“I look at debts in three categories. I don’t buy this bad debt, good debt argument. I think there are three types,” Vince said.

“There’s what we call red debts or danger debts, and they are debts that arise because you’re spending more than you’re earning, which broadly means personal loans and credit cards and loans from family. And they are to be gotten rid of as a priority.

“Then we come to amber debts, which are okay, and they are largely around spreading the cost of an asset over the period you’re going to use it. And that’s usually where you live and what you drive.

“Then we move on to the green debts, and they are debts incurred to grow your asset base and they obviously come last.”

However, Vince firmly believes that people need to spend money in ways that help them achieve their true life goals and values. These principles also apply when it comes to reducing debt.

“I do like that whole mindfulness concept, and probably the one that I use most often, is that if some is good, more isn’t necessarily better. And so with the point we’ve just discussed about paying off your debt – paying down your home loan is good, but not if it comes at the expense of something else,” he said.

Listen to the full interview here.

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