Should I invest or top up my super?

Tips

First steps to building wealth

For most people, cash comes in – in the form of your take-home pay. And it goes out – paying bills, paying the mortgage, holidays. For a good part of your career, there might not be much left over.

If you reach a point where there’s some surplus cash flow, it’s a good problem to have. There are many ways to make the most of it – to reinforce your financial foundation, or start building wealth for the future. But for many people, paying off that non-deductible debt (credit cards, personal loans, home loan etc) is the priority.

Paying extra off your home loan now will reduce your monthly interest and help you pay off your loan sooner – and if your home loan has a redraw or offset facility, you can still access the money if things get tight later.

Once you’ve done that, you might start thinking about investing any extra cash in the share market or in property – or using it to top up your super. There are a few things to consider first.

Don’t think of super as a closed box. You should regularly review your investments and performance online.

A question of circumstances

First, it’s a matter of age. Investing extra cash is generally a good idea if you’re younger and you may want to consider an investment strategy that could allow you to retire early if you wanted to.

But if you’re closer to retirement and in a stable job, topping up your super could be a better option.

The key question is whether you’ll be able to (or want to) remain in paid employment until you can access your super.

Later in life, people may want to leave or scale down their work, but are not eligible to draw on their super yet. In this situation, having investments both inside and outside super from a relatively young age is beneficial.

When weighing up the pros and cons of these options, keep these questions in mind:

  • What is the likely balance you’ll need in super? Work backwards starting from how much you need to live on each year. What’s your current balance? What are you currently contributing? Are you on track to reach that number?
  • If you have children, how old are they? When will they leave home and become completely financially independent? People who started a family at 40, for example, may need every penny they have until they’re at least 60.
  • Are you single or in a long term relationship? Single people generally have fewer demands on super and want greater flexibility with other investments. Couples should look at how much they can save together, and whose balance needs topping up.
  • What are the tax implications? Investment returns are taxable, providing higher-income earners with lower benefits when investing outside super. Talk to your accountant about the potential impacts of both options on your personal tax position.


Investing: spread your risk

If you’ve decided to invest some or all surplus cash, diversification is a smart idea as it spreads risk across multiple assets. But if you don’t have a large upfront sum to invest, there are only so many baskets you can split your eggs between.

Consider starting with exchange traded funds (ETFs). These are passively managed investments that track an asset or market index – for example, the top 200 Australian shares. You’ll be exposed to a range of growth assets, and you can buy and sell your ETFs like shares.


Superannuation: don’t set and forget

Don’t forget that super is an investment in itself, and you have the power to direct it.

People sometimes think of super as a closed box. But it’s actually the opposite: Australian super rules are very empowering for individuals. You should regularly review your investments and performance online.

Your fund may have a default investment option, but should also let you choose from a range of other options – some options may involve greater return potential at a greater investment risk. Check your fund’s website for details.

Finally, super is a long-term investment, at least until you retire, and potentially much longer if you leave your money in super and draw a pension after you retire. 

This long investment term, coupled with the concessional rate of tax on your super investment returns, means your returns can add up and generate further investment returns on those returns.  This is known as compound returns, or compounding.  Compounding is a powerful way to build wealth, and super is a great place to start that compounding process.

Whatever you decide, it’s worth seeking advice from a licensed financial adviser first. Friends and family might be keen to offer their opinion, but remember what suits them may not be the best approach for you. Only you can make the decision, and it’s your responsibility to make sure your investments are going to work for you.

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