Investing for the future

Bruce and Carmen, in their early 30s, have a $150,000 home loan, and they’ve been making fortnightly repayments of $700. When Bruce gets a promotion and a pay rise, they sit down to work out what they should do with the money. Should they start saving for retirement, save for their toddler’s future tertiary education, or just lift the mortgage payments?

Even though they’re on a fixed interest loan, they can lift their repayments by $25 each fortnight without penalty. If they do this, their home loan will be paid off 10 months earlier and they’ll save over $5,000 in interest.

If they just save the $25 and earn 3 percent per annum after tax and fees over the same time, they will earn less than half the amount of interest that they save on the home loan repayment option.

They decide to lift the mortgage repayments. They’ll be mortgage-free by the time their daughter starts tertiary studies, so they’ll have more disposable cash to be able to help her out then if they want to. And they will still have a couple of decades to save for their retirement.