This is a topic I have struggled with, trying to work out where best to put my “excess” money (although feels like this is a thing of the past in this cost of living crisis!). The options (as I see them) are as follows:
- Paying off mortgage early
- Making extra contributions to my SIPP / Pension
- Pouring more money into my ISA
My thought process is as follows:
For Option 1, paying off my mortgage earlier, there is a lot written about this. Whilst interest rates remain low, the return on capital will always be lower pouring your money into your house. However, reducing your expenses as soon as possible will give you more cashflow to put into other things, and will give you the all important “f*ck you” peace of mind. With your house paid off, your chance of reaching FIRE, at least psychologically, seems more likely. The mortgage is most people’s biggest bill, eliminating it has to be the best feeling.
Option 2, increasing pension contributions. The has the obvious benefit of tax relief, but I currently earn just under the 40% threshold so the advantages are not as great. However, once this changes, I am will try my best to reduce my tax burden by putting more money into my SIPP. It also becomes worth a lot more after this point (you get nearly double your money in tax relief). The major drawback of the pension is I won’t be able to access it, no matter how lucrative it is, until I am 55/56 (I believe this is due to change). Which completely undermines retiring early. Having said that, I would need less money to retire at 35 if I only needed to last 20 years (to 55) before picking up my pension at that point.
Pour money into ISA, growth and income producing dividend stocks. This seems like the sensible option for now, as I am now 26. It also does not shut the door to any of the above options to be used later in life. Does anyone have any thoughts on this? I blend of all of them seems to make a lot of sense. But I don’t know if I have the cashflow right now to do this. I may have to return to house hacking to increase my income and allow me to invest far more into further income.
The nuclear option I am considering at the moment, is selling my house and investing my money into various income producing assets. I could rent for £1000 a month, and still yield around £500 from dividend stocks, and things like BlockFi (although I would be cautious about my usage of this) and peer to peer lending with Bondora.
I’ve been thinking a lot about this, but the mechanics of the real-estate market are just so hard to beat!