Should You Save, Invest or Pay Off Debt?

The idea of investing your savings is appealing to many Australians. The Australian Securities Exchange (ASX) has delivered a 9.3% average return over the past 10 years³. That’s a little more enticing than the 0.05% you might be lucky to earn in a savings account. 

But investing is a whole other kettle of fish. It’s a deeply personal decision that comes with a bunch of other questions, such as ‘what’s your appetite for risk?’, ‘how long do you plan on investing your money?’ and ‘what do you want to invest in?’

Earlier in the year, the ASX released its annual Australian Investor Study and the results show that Australia is a nation of wealth builders. Given that 46% of adults hold some form of investment outside of super and property, it’s not surprising that the fear of missing out may be a strong motivator for those sitting on the fence about investing. 

Interestingly, the report found that 34% of respondents named ‘becoming debt free’ as a key money goal, which made us think – if you’re getting a 9.7% return on your share portfolio but paying 17% interest on a credit card, are you really coming out on top?

Like your wise older sibling, we want you to fully understand your financial situation before making a money decision. So if you’re wondering whether you should save, invest or pay off debt, let the below hypotheticals provide some food for thought.

Our micro-investor discovered an app that lets him round up his daily transactions and allocate them to a predesigned portfolio. He’s not a big spender, but he makes a lot of small transactions every week – coffee and lunch every day, plus a beer or two at the pub, that sort of thing. His round ups average around $12 each week, which means he’s able to invest $624 over the year. 

His micro-investment portfolio is delivering an 8.5% return – not bad! Unfortunately, the app takes a $3.50 fee each month, which gives him a real return of only $11 on his round up investment each year.

Our micro-investor friend also splashed out on a new car recently. He still owes $17,500 on the principal and pays an interest rate of 12.6%. If he’d used those round ups to pay a little extra off his car loan, he’d save $80 in the first year alone. Better than an $11 return on his micro-investment, wouldn’t you say?

Humans have a general tendency to want to see numbers grow, not shrink. So when we hear that we can make money by investing, we don’t necessarily think of the money we can save by paying off debt sooner. That’s why zooming out and looking at the entire picture is so important when making financial decisions.

Our seasoned investor has bought and traded stocks on the ASX for several years. She does her research and has a pretty good handle on the game. Her average annual return is around 12% – more than 2% above the ASX average. 

She’s always been good with money, and when she heard about credit card “points hacking”, she saw it as another way for her to get ahead. Enticed by sign-up bonuses and double points promotions, she quickly lost track of how much she was spending. Now, our savvy investor is juggling two credit cards with 16% and 19.4% interest rates. 

Suddenly, her 12% investment return doesn’t look so hot. She has to sell some of her shares at a loss just to get on top of her debt.

Our aspiring homeowner was never too worried about saving for a property. He travelled on and off for several years and figured home ownership was something that ‘future him’ would have to deal with. Since the pandemic, he’s been living with his parents while his friends purchase their first, even second homes. 

He’s working overtime to save for his deposit, but there’s one nasty bill that takes a big chunk of his earnings each pay – a $4,000 travel loan he took out to fund a previous trip. The 14.6% interest rate is taking a toll, but he’s still only repaying the minimum amount so he can focus on building up his house deposit. At this rate, he will end up paying nearly $1,000 in interest over the 3-year loan term.

He’s already put more than $6,000 aside for his house deposit. If he bit the bullet and paid off his loan in full, he’d be almost $1000 better off in the long run. It’s tough to see your savings take a hit, but when you look at the bigger picture, paying off high-interest debt is always worth considering.