When you have extra cash left over each month, it may be wise decision to improve your financial standing by paying off debt or by making investments. More households are paying off their mortgages in record time that ever before.By doing so, you can increase your net worth, but the effect of both of these options will not have the same impact on your bottom line. While many people will prefer to pay off debt before making investments to enjoy the peace of mind that comes from knowing that they owe less money to creditors, there may be solid reasons why making investments are a better option. Consider these points as you make your decision about how to allocate your money.
Mortgage Interest is Tax Deductible
When you pay additional money toward your mortgage balance, you will be reducing your principal balance and increasing equity. You will also be reducing interest charges over the life of the loan. While this is beneficial, it can impact your tax liability. In fact, you may find that you pay more in taxes for years to come as a result of paying down the principal. There are useful resources available online that can allow you to discover where changes can be made with regards to your mortgage. Make sure to take a close look at how the benefit of reduced interest charges may impact tax liability before you finalise your decision about how to proceed.
Investments Can Benefit From Compounded Growth
The equity in your home will continue to grow through principal debt reduction and property value appreciation, and it may grow at a faster rate when you make additional payments to be applied toward principal. However, when you make investments into CDs, dividend stocks or even an interest-bearing money market account, you will benefit from the effects of compounded growth when you re-invest the growth. Over time, the effects of compounded growth can be significant, and you can get started benefiting from compounded growth with the initial investment you make in the near future.
Deciding how to use your extra funds is not a matter to take lightly, and there are benefits to both paying down debts and making investments. Keep in mind that it may be best to pay down high interest credit card debts first. Then, you can create a spreadsheet analyzing all benefits of both principal mortgage reduction and different types of investments. By making this comparison projected out over the course of a few years, you will be able to see for yourself based on your unique circumstances which options are best for you. This is an important practice to undertake, especially if paying off your mortgage forms part of your retirement strategy.
Every case will be different when it comes to looking at how best to invest your money, out with your mortgage. The best advice would be to do some further reading on the subject, as there has been a lot written about this across the web. Sites such as MoneySavingExpert and Money Supermarket hold invaluable information for people with mortgages looking to get the most out of their money.
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