Also read the following related articles:

• Save or pay off debt?
• How to invest spare cash

Question:

Your article on choosing property as investment (click here to read the article) was good, but it does not give me a clear answer on the following question:

If you have one property and some money to save, is it better to add that money to your bond repayment to withdraw later when required or to start a savings investment plan with that money?

Answer:

There are so many factors involved in planning one’s savings that there is no standard answer. One way of making a decision on where to invest your budget surplus would be to determine if the savings are going to be over the long or short term. Another factor to take into account is how comfortable you are with market volatility. And then there is the matter of tax efficiency; can your investments be structured to save you tax? On the issue of liquidity; do you need access to the cash for emergencies?

What appears to make the most sense in the current economic climate is to put any extra cash you may have into your bond. A bond rate of prime plus one percent would be 11 percent right now, which equates to a guaranteed after tax saving of 11 percent. If you were to invest that surplus cash into a money market account you would only receive about seven percent right now, and after a certain amount was saved up you would be liable to pay tax on the interest income thereby further reducing the return.

If you were to purchase equity-based unit trusts, or a direct share portfolio instead, your short term return is unknown. Various economists are worried that we will enter into a period called a "double dip recession", which means that the stock market will decline rapidly again sometime in the near future. Other economists, however, predict that our economic recovery is underway; it may remain a little unstable for now, but the economic recovery indicators (such as new car sales) are improving albeit slowly. That’s the way it is with short term investing. Either you get a low but "safe" return or you take a chance with market volatility.

If you intended using the funds for something else in the next three to five years then it might make sense to put the money into your bond. A guaranteed 11 percent "return" is better than a possible loss in shares (unless you’re prepared to take the risk). Investing in another property is not liquid enough for a short term investment, listed properties are just as volatile as shares and even bonds won’t return more than 11 percent right now (especially after tax on larger amounts).

If you are using the extra cash to save for a long term goal (such as your retirement), then it’s best to look at long term historic returns on the investment classes as an indication (but still not a guarantee) of what to expect. The best returns over time have come from shares. But before you invest in shares you have to understand how they work, what market volatility means and be comfortable to stay invested for the long haul. You also have to make sure that the best investment vehicle is being used for tax purposes.

It’s so easy to get information overload, which is why speaking to a certified financial planner to look at your whole plan, not merely a section of it, is a great idea. A financial planner can help you maximise your returns while taking all of your other considerations, fears, targets and goals into account. There is nothing wrong with paying all extra money into your bond, you will save thousands on interest. However, at retirement, if all you have is your paid up home, you will have to sell it in order to survive. Make sure your long term strategy includes savings as well as paying off debt.

acsis Limited is an authorised financial services provider. The response to the question covers some of the issues in a general and factual manner and does not constitute advice. It is important to consult with a financial planner who, after an analysis of the individuals? personal needs, goals and circumstances, will be able to provide comprehensive and appropriate advice.