Invest or pay off debt? Why not do both?
Finns have traditionally repaid their home loans quickly. But is that the right move? Saving Manager Tara Toikka tells us why it’s wise to start investing while repaying your home loan.
Owning a home is important for Finns and they usually want to pay off their home loans and become debt-free as quickly as possible. But Toikka has seen a gradual change in this mindset. People are now considering other options, too, such as investing alongside their loan repayments instead of rushing to pay off the debt.
According to Toikka, monthly saving can give you a higher return on your money compared to only focusing on home ownership and paying off your loan. Toikka gives two examples:
“If you have taken out a home loan of 200,000 euros and your monthly repayment is lower, such as 700 euros, it will take you 25 years to repay the loan. During this time, you can also build a nice buffer for the future by investing 200 euros a month in funds, for example.”
“If you pay off your home loan at a pace of 900 euros a month in 20 years instead and then try to save up a similar buffer in just five years, you would have to invest 1,700 euros a month.”
Slow and steady wins the race
Patience is a virtue when investing, as you will benefit from the effect of compound interest over time. The longer you save and invest, the more your money will grow. Compound interest means that both your monthly investment and the accrued interest will increase the value of your overall savings pot. So putting aside even a small amount each month can add up to a tidy sum in the long run.
How much do you need to get started?
“The amount to be invested depends, of course, on your personal finances and circumstances. A good rule of thumb is that you should spend about 40% of your income on essential living expenses and invest part of the remaining money. If your loan repayment is 700 euros, your monthly investment could be 200 euros, for example.”
Home sweet home?
Does it make any sense to buy a home or an investment flat? According to Toikka, buying a home or an investment flat is still a good investment especially in big cities but it’s difficult to access the money if you need it for unexpected expenses or want to realise your dreams.
“When you need cash quickly, you can’t scratch it off the walls. What if your home doesn’t sell or you don’t want to give it up for sentimental reasons? Investing in funds is a more flexible option because you can access your money quickly, if needed, and have it in your account in just a few days.”
Naturally, there are other ways to invest, too, but Toikka sees funds as an easy way for budding investors to get started. Funds are managed by experts and offer a good diversification, which makes investing in them easy and lucrative.
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Our calculations show why it’s smart to save during the loan period
The examples below illustrate the difference in the total value of your savings in the following scenarios:
- You extend your loan period from 20 to 25 years, which allows you to spend less money on your monthly loan payment and put it in your savings instead.
- You only start monthly saving after first having paid off your loan in 20 years and save for 5 years (25 years in total).
In both scenarios, you are saving 200 euros a month:
- In example 1, the total value of your savings will be 102,103 euros in 25 years.
- To reach the same outcome in example 2, you would have to save more than 1,700 euros a month for 5 years.
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Important information about investing
The information provided on this website is intended for general product information only and does not constitute investment advice or recommendations. When it comes to funds or equities, past performance is not a guarantee of future results. The value of fund units or equities may increase or decrease due to market movements, and it is not certain that you will get back the entire amount you invested.