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Should I save while repaying a loan or pay off the loan as quickly as possible?
Finns have traditionally repaid their home loans quickly. But is that the right move? Saving Specialist 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.”
- By extending your loan period by a few years, your monthly expenses will remain the same but you will be able to put some of the money towards your savings. Once your loan is paid off, you will have both a home and a nicely growing investment.
Take advantage of the effect of compound interest
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.
Prepare for changes in interest rates by saving and investing
Saving monthly in a fund could help you build a financial buffer. When interest rates are low, you have an opportunity to put aside more money and grow your savings while repaying a loan. When interest rates are higher, you can reduce your contribution or use your savings to cover your rising loan costs. These are some ways in which you can adapt to the changing interest rates and build a buffer of savings for times when your finances are tight.
How much do I 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.”
What should I invest in?
“When you need cash quickly, you can’t scratch it off the walls of your home. 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 investment funds as an easy way for budding investors to get started. Funds are well-diversified and professionally managed, which makes investing in them easy and more lucrative than keeping your money in an account.
Let’s find the best way for you to save and invest
Book a free meeting with us for investment advice. We’ll find a solution together and prepare a tailored saving plan for you. The meeting is always without any obligation. You can also start investing right now with the help of our digital investment adviser Nora.
