When it comes to building wealth, balancing financial strategies can be challenging, especially for single-income households. A client of our, Mary (not her real name), a 40-year-old single mum earning $125,000 per year, was navigating this very dilemma. With a $450,000 mortgage (6.1% interest rate) on her two-bedroom unit, $40,000 in her offset account, and $10,000 in shares, she’s asked Shane the million-dollar question:
“Should I invest more in shares or keep money in my offset account?”
Understanding the Offset Account Advantage
An offset account is one of the most powerful tools for reducing your mortgage costs. By keeping money in this account, you effectively lower the balance on which interest is calculated. For Mary, her 6.1% mortgage rate means every dollar in the offset account earns her a 6% tax-free, risk-free return.
Historically, this is an excellent return when compared to other low-risk options. If your focus is on stability and immediate cost savings, an offset account offers unparalleled benefits.
The Case for Shares, “Higher Risk, Higher Returns”
On the other hand, shares and other growth assets historically deliver higher returns over the long term. The average annual return, including capital growth and dividends, often exceeds 10%. That’s significantly higher than the effective 6% Mary earns through her offset account.
But there’s a caveat…volatility!
Share prices can fluctuate dramatically in the short term, and a downturn could erode your portfolio’s value. For investments under three years, this risk becomes a real concern. However, if you’re prepared to invest for seven years or more, the probability of outperforming your mortgage rate grows considerably.
Key Factors to Consider
1. Risk Tolerance – Investing in shares requires comfort with the possibility of short-term losses in exchange for potential long-term gains.
2. Financial Goals – Mary’s goal is to build wealth over the next 10 years to upgrade to a bigger home. Shares align with long-term goals but come with higher risk.
3. Split Strategy – If unsure, Mary could consider splitting her funds—keeping half in the offset account for stability while investing the other half in shares for potential growth.
What Does History Say?
Looking at historical data, shares generally provide a 3%-4% higher return than the interest saved through an offset account. That difference compounds significantly over a decade, making shares a compelling option for those with a long-term perspective.
However, remember that historical returns are not guarantees. Market conditions, personal financial goals, and life changes can all impact outcomes.
The Verdict “Choose Based on Your Goals and Risk Appetite”
For Mary and others in similar situations, the decision ultimately comes down to your attitude to risk and financial priorities. If minimising debt and enjoying risk-free returns is your priority, your offset account is a safe bet. However, if you’re focused on long-term growth and can weather market ups and downs, investing in shares could help you build wealth faster.
Actionable Tips
1. Use Inspired Money’s mortgage offset calculator to understand how much you’re saving annually.
2. Research diversified share portfolios or ETFs to reduce risk.
3. Consult an Inspired Money financial adviser to create a tailored investment strategy.
Balancing your financial decisions between risk and return is the key to success. Whether it’s your offset account or shares, the right choice is the one that aligns with your goals.
Ready to Build Your Wealth Smarter?
Take control of your financial future today. Whether you’re looking to maximise your savings or grow your investments, a tailored strategy can make all the difference. Contact the Inspired Money team now to explore your options and unlock the path to your goals. Your next big step starts here!
The information provided in this article whilst specific to Mary is designed to be general in nature and does not constitute financial advice. Financial decisions, including investing or managing debt, should consider your unique situation, goals, and risk tolerance. We strongly recommend consulting a licensed financial professional to ensure your strategy is tailored to your specific needs and circumstances.
