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Personal info

I'm a single man in my mid thirties living in Spain. In 2019 I saved around 900€ per month on average after taxes. Most of that went to pay some one-time taxes and the rest to an emergency fund. Now I feel like my emergency fund is enough, so I would like to invest this extra money somehow.

Savings

I have an emergency fund of about 2 months of expenses. In the case I lost my job (not likely, but who knows what could happen) I have right to unemployment subsidy that would cover like 50-60% of my current monthly expenses, and that without considering I would cut some of them in case of unemployment. I'm a software developer so, given the current job market for those, I would expect to find a new job in less than two months.

Debt

I have a mortgage, 95k still to be paid at a fixed rate of 500€/month for almost 18 years. Interest is 2.1%. Early payments are free of charge.

Possible big expenses

  • I'd like to change windows on my appartment. I would expect this to be around 5k€. By doing this I would improve energetic efficiency of the house and expend less on heating/cooling.
  • I'm considering buying a parking spot in some garage. I own a car and currently park it on the street, but I started having some problems (car got hit a couple times while parked without any note of the hitter, someone stole one of the outside mirrors, etc). By the little research I made this could cost around 10k. Also, since this is considered real estate I could be able to add this to my mortgage, but I would need to talk to the bank first.

Future investments

Now I have to decide what to do with this monthly leftover money. I don't want it to be sitting on some bank account. I'm thinking about putting some fixed amount (400 or 500€) towards a fund to change the windows and put the rest into some kind of long term investment.

My gut tells me to pay the mortgage early, since I don't like debt at all, but I realize that could not be the best option for long term savings.

What would be the way to maximize the long term savings in this situation?

  • "I'm thinking about putting some fixed amount (400 or 500€) towards a fund to change the windows". To better insulate the house, or because they're old and need replacing? – RonJohn Jan 13 at 14:09
  • "Early payments are free of charge." → Pay your debt now, ask yourself hard questions later. – 88892 Feb 1 at 18:15
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It's question of costs vs. opportunity. Swapping out the windows, how much would you realistically save per year? Let's make up a number and say that it saves you (to make the math easier) 50€ / year if you swap them out.

50 / 5000 = 0.01, or a 1% return on your investment. Now, let's look at your mortgage: That has a 2.1% interest rate. As such, any investment made into your mortgage has a 2.1% rate of return, in that you owe 2.1% less money than what you put into the mortgage payment. The mortgage is the better choice at this point. If you estimate that the windows would save you 150€ annually, then they would become a 3% return on investment, and would become the better long-term strategy (assuming you plan to stay in your current residence moving forward). You can apply similar thoughts to your car parking garage scenario. Will you be repairing all of the damages to the car from parking on the street? If so, the garage may well be a worthwhile expense.

With regards to a long term investment, that makes the math a tad more complicated. Your initial rate of return for that long term investment might be much lower (say, 0.5%) but paying dividends that will go back into the investment and progressively increase the amount in there due to compound interest. Unfortunately, no one really knows what investments will turn into bulls and what investments will turn into bears in the long run, so it's impossible to give a concrete prediction of how much money you will or won't make off of any given long term investment in the long run. My personal opinion is that it's wise to dump whatever extra you have into a personal/retirement fund for the future and then don't touch it for at least a decade.

The final factor to consider is how happy you will or won't be with whatever decision you make. It might make more financial sense to take care of the mortgage first than to get new windows or to get the garage spot, but if you're going to be absolutely miserable based on that choice, then it's probably wiser to be happy. (Especially if it works out to something like a 1.9% return on investment vs. a 2.1% return on investment).

Life's short, and your happiness should be a factor in some of your economic choices. You already proposed saving up a little bit throughout the year for the "I want" things vs. the "I need" things, and I think that that's an excellent compromise if either or both expenses are very important to you. I would caution you to save up for them first, then spend the money as opposed to taking out a loan of some sort to get it right now, though it sounds like your personal sensibility is to avoid debt anyway, so good on you.

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What would be the way to maximize the long term savings in this situation?

For short-term goals (next few years), save (as opposed to "invest") the money.

For longer-term goals, invest the money in a mix of stocks and bonds (specifically low-cost "mutual funds" and ETFs -- Exchange Traded Funds). Unfortunately, I don't know where to point you in Europe.

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  • Note that ETFs are usually not a good idea for retail investors in Spain, as they don't get the same tax benefits that mutual funds. – carrdelling Jan 13 at 19:59
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What would be the way to maximize the long term savings in this situation?

Strictly speaking, you should find investments able to beat that 2.1% mortgage, and pay it as slowly as possible. However, this depends on a lot of factors.

Unfortunately, the fact that you are in Spain makes the answer slightly different to the usual ones, partly because there are several products that you are not going to find there (e.g. CDs, unit trusts...) and partly because other products are not really competitive due to our tax rules (e.g. ETFs are definitely not worth in Spain compared with traditional mutual funds, due to loss of tax benefits...)

You need to estimate how good would be for you to own the parking spot and change the windows in terms of quality of life. Being able to forget about the problems of having your car park on the street, and having decent insulation in your apartment may very well have way more value to you that the 15000€ that they cost. If that's the case - and considering that you already have an emergency fund set up - I would go for both improvements.

After that, my advice would be to simply continue paying your mortgage as normal, and in the meantime learn as much as you can/wish about personal investing. Learn a bit about stocks & bonds and their differences (you can find a lot of information online, even in Spanish), and after that you can start searching for proper investments.

Currently in Spain - or at least until I left a few years ago - trading stocks by yourself is quite expensive, private pension plans are not competitive and the rest of products are too esoteric/hard to find. So your best option is to look for investment banks that allow you to invest into mutual funds (avoiding traditional/retail banks as they are usually too expensive - and instead looking for entities focused on investments only).

It will take you some time to learn (which is why I would continue paying the mortgage in the meantime), but after that it should not be difficult for you to beat that 2.1%, given a sufficiently large timeframe.

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