This is Motley Fool Money. Welcome to Motley Fool Money, the money hacks edition, our short weekly check-in on how you can make the most of your money. I'm Scott Philton with me, as always, Dr. Niva Mahanti.
G'day, Doc. Good day, Captain. Mate, our favourite. We've got a question for all this.
A question from Frankie. And Frankie says, hi, another female fan of the show. Awesome. Well done, Frankie.
Thank you. It's been great to hear increasing questions from other women on this investing path. Your podcast is a soundtrack to my weekly runs, and I find the info uber helpful. Oh, thank you, Frankie.
It's very kind. Now, Frankie, you've got a question, mate. My question, or perhaps confession, for some context, I'm loosely following the FIRE Principles, which is financially independent, retire early, with the goal of having some financial freedom in the next 10 years. Very cool.
I'm aggressively paying down the mortgage as well as investing, so hopefully down the track I can work less. I feel you paying. I've been following the advice of keeping investment fees as low as possible. Good work.
About a month ago, I sold out of a managed fund version of a product that had a management fee of 0.9% to move to the ETF version that has a fee of 0.27%. That is sensational. When I did the maths, I saw a long-term compounding effect I decided to sell. Now, she says, but now I have a reasonable amount of cash to get my brokerage account, and I feel a bit paralysed to buy back in.
So she's done the sale. She hasn't yet bought the ETF version. The dollar's sitting there now tempting me to throw it in the mortgage. How would you weigh out the risks and benefits of investing over the relative safety of the mortgage during this strange and uncertain landscape?
Love your work. Frankie. Frankie, that was a spectacular question. Thank you again for listening.
Do us have some friends. Help there on the path as well. In the meantime, Doc, let's answer Frankie's questions. So let's start with, why would you invest rather than pay down the mortgage?
All right. Thank you. So the reason to invest is easy. Higher rate of return typically in markets or stocks.
If you buy your stocks, you're hoping to get a relatively higher rate of return. So that's if you get 8%. Mortgage is maybe 2.5% or 3%. There's a differential rate of 5%.
That's a big difference. Now, there is some tax benefit. Obviously, mortgage saving is tax-free, but it only takes it to 3.5% probably. So you're still well until you're ahead if you get the average annual return.
That's right. Well, then you take that average return, and if you're investing actually for the long term and you're really holding stuff for the long term, then you get your capital gains tax benefits, but you also get long-term compounding. You get long-term compounding, capital gains tax benefits. Those are two benefits.
But on top of that, you get diversification, right? You've got different assets that you're holding. You hold property, mortgage on property, shares, interest in different companies. So you get diversification.
It's always good. Super important. And that long-term benefit, again, 2% versus 7% in one year is good. Over time, that just runs away, right?
It's a huge, huge long-term benefit. Now, here's why you might pay down the mortgage instead, Frankie. The first is you've already mentioned relative safety. I call it security.
So just the idea that shares will be all over the place. If you own it, that's great. But if you own your own home, well, short of doing something horribly wrong, no one can take it away from you. The simple factor of owning your own home is a huge, huge financial benefit security-wise.
Relate to that, the sleep at night test. So, yes, I think over the long term, shares will do better than property, and certainly in the interest, you're saving on the property. So there's value in that. But don't get a couple of percentage points if it keeps you up at night.
If you can't sleep. Well, you know, I'm a big fan of actually paying debt back early, so I would actually try to do the half and half, largely because I'm totally realizing that there's this difference and I like to be less indebted, and I would actually partially pay half and half. That would be my strategy. Interesting.
I like that. I would, again, it comes to Frankie what to do. Personally, I would happily invest it in shares. I think if the money came from shares, I'd put it back into shares and leave it there.
I think paying off the mortgage, if you guys do, you're completely fine. I'd be a fan if you want to. I think I'd try and mentally keep that separate and say, well, if you hadn't sold the investment, it wouldn't be available to me. In this case, not only if you're taking some new lump sum that you're trying to work out where to put it, you're actually taking money out of investing in shares and put it into the mortgage.
So I think I'd invest it. Again, pay a lewd off if you want to. Again, if Frankie or someone else is different, it's actually what I do because I just feel better about it. I would absolutely support that wholeheartedly.
Again, the rational, emotional, kind of logical components of all those things need to be way up against each other. Whatever makes you feel better at the end of the day, whatever you can live with, whatever you kind of literally dig in your stomach, if you're like, you know what, I'll feel better if I do X, that's probably the right thing to do, I reckon. That's it. Frankie, we hope you've helped.
I hope you've got other listeners as well. And as always, send your questions. We'd love answering them. In the meantime, fool on.
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