I was recently talking to a friend who just happened to mention that they had a few thousand dollars sitting in a savings account earning interest. Great! Except that they are a home owner.
In my opinion, you should never have money in a savings account if you have a mortgage, or any debt for that matter.
There’s no point earning interest on savings, while you’re paying interest on a debt, particularly when that interest you’re paying will undoubtedly be much higher than the interest you are earning.
Same goes for credit cards- if you have any interest bearing credit card debt, then pay that before anything goes to your savings account.
I’ll use the Commonwealth Bank as an example. Currently, if you have a Goal Saver Account with them, you can earn 2.7% interest.
If you have a mortgage with CBA and utilise their Standard Variable Home Loan, you’ll be paying 5.6% interest. That’s more than twice the savings interest rate.
Even if the interest rates were the same, you’re still better off paying down your mortgage, as any interest earned from savings is also taxable.
Think of extra money in your mortgage as tax free saving at twice the interest rate of a normal savings account!