Welcome to The Money Coach, a Times of Malta column where readers can ask questions about life's money issues. Send your questions about personal finances, inheritance, gifting or other personal finance topics to moneycoach@timesofmalta.com
Dear Luca,
At 30 years old I have just inherited a large sum of money which is practically enough to pay off the home loan, that me and my wife applied for five years ago, completely.
Just thinking about it feels so incredible, my wife and I would be loan-free, and I cannot say how lucky this makes me feel especially when considering that others my age have a sizeable monthly loan repayment to pay for the upcoming 30 years or so.
However, these past few months I’ve taken an avid interest in investing, and even building my own wealth. And whilst paying off the home loan early certainly has its benefits as it means less money to pay each month, there is still the factor that if I use my inherited money to invest, I could potentially be in a better state in the future.
What is your opinion on this matter? The amount of money I inherited is just enough to repay the entire home loan, so if I get rid of the loan, I’d have no money left to invest.
Regards,
Lucky Heir
Luca responds:
Personally I don’t agree with paying all your loan given the low interest rate of home loans.
It doesn’t mean that paying it before is wrong. On the contrary, if it has always been your primary financial goal, and you’d really sleep better at night if it is paid, then by all means go for it.
Without doubt not having to pay the monthly loan amount and being in the knowledge that you fully own your home are both very enticing.
Another option can be paying a large sum of your loan, as this would give you the opportunity to reduce the monthly repayment significantly… the loan term would remain the same in terms of the number of years, but you’d have less to pay per month.
With the extra money left you can look to start investing it. There are of course many options, including buying another property to rent it out… and also gradually investing in the stock market.
The following is not investment advice, but a bit of education of the potential that investing in the market holds.
When investing there are several options, including Treasuries, Bonds, Stocks, ETFs, Mutual Funds, and many are now also venturing into the popular, and yet volatile, crypto markets.
The S&P 500 which covers USA’s top listed companies in the market averaged a rate of return of 8%-10% in the past 90 years. Does this mean that it returned 8%-10% every single year? Not at all! The rate of return differed each year, but if you take an average, you’d have 8%-10% per year.
If I were you, I’d consider dollar-cost averaging—an approach where you contribute a fixed amount each month. This strategy helps to ease the process, making it feel less daunting while also smoothing out market fluctuations. Committing a large lump sum all at once can be risky, particularly if you’re not familiar with the ups and downs that often accompany financial markets, including stocks, funds, and even cryptocurrencies.
You’re still 30 years old, starting to invest seriously now with a long-term view can be life-changing… making the most of the power of compound interest.
How does compound interest work?
To make compound interest easier to understand, let’s get into the story of Paul and Laureen. Both decide to invest in a mutual fund that historically gave an average rate of return of around 11%.
It can be hard to understand just how impactful compound interest can be, given time.(Note: Since mutual funds don’t earn a fixed rate of interest, I’m using this average annual return to calculate the compound growth of their investments.)
Paul
- Starts investing at age 21
- Invests €2,400 every year
- Stops contributing money at age 30
- Total amount contributed: €21,600
Laureen
- Starts investing at age 30
- Invests €2,400 every year
- Contributes money until age 67 (a total of 37 years!)
- Total amount contributed: €88,800
At age 67, Paul’s investment grows to over €2.1 million, while Laureen’s reaches more than €1.2 million! Nine years made a difference of nearly €1 million. Paul ends up with close to €1 million more, despite only investing for nine years and stopping at age 30. And it’s all thanks to the incredible power of compound interest.
Luca is the founder of the Money Coaching Hub. Email him your financial questions or your response to today's question at moneycoach@timesofmalta.com for a chance to be featured in a future column.
Disclaimer: This column is intended to provide general information on various topics related to personal finance. The information provided is for educational purposes only and should not be construed as personalised financial advice for your specific situation. Financial decisions are highly individual and can vary greatly based on your unique circumstances, goals, and risk tolerance. The author of this column is not authorised to provide financial advice. Before making any financial decisions, it is recommended to seek professional financial advice from an authorised financial advisor.