The goal of both investing and repaying debt is to grow your net wealth so you can afford more of what really matters to you in life.
Net Wealth = Investments less Debts. So, ignoring interest for now, each dollar of either investment or debt repayment equally increases your net wealth.
Whilst the mathematical angle is the common approach to this question, I prefer to prioritise looking through the lense of wellbeing.
First boost your financial wellbeing
Financial stress is the most prevalent form of stress.1Australian Psychological Society Stress and wellbeing in Australia survey 2015
Having debts hanging over your head, no emergency savings and feeling a lack of control are common reasons people feel persistent stress about money.
I suggest you prioritise the use of your savings as follows:
- Cover your predictable commitments coming up in the next 12 months so you’re not caught short, which can lead to more debt, interest and stress.
- Get the monkey off your back by repaying consumer debts such as credit cards, car and personal loans in this order. Typically the interest rate on these debts is higher than common investment returns, so it also grows your net wealth faster.
- Boost your sense of security by building a contingency fund of emergency savings to cover at least 3 months of all expenses.
Having done that you will at least be living year-to-year and well along the pathway to financial wellbeing.
Then consider investing
Then it’s appropriate to consider the mathematical angle of interest rates because there are tax incentives that can make it advantageous to invest toward your retirement goal before fully repaying your mortgage.
At that point the right answer for you will depend on your timeframe and tolerance of investment risk, so seek specialist advice from a licensed financial planner.