My goal is to be debt-free as soon as possible so that I can have financial freedom and that, should I need to change work, I don’t have to worry about debit orders dragging me down (car and house).
- I have currently parked R180 000 in my access bond at 10.9% (I still owe R470 000 on my bond)
- I have a car loan with a settlement value of R178 000 (four months old); the monthly payment is R3 780.
- For the next three years, should all go well (I work in the volatile construction industry), I will be able to save R8 000 to R10 000 per month.
- In addition to the above, I am also contributing R3 000 a month to a retirement annuity (RA).
What would your advice be?
In preparing this advice, we have assumed that the interest rate on your vehicle is at 11.38% per year. This is based on data supplied by the South African Reserve Bank, which tracks average interest rates charged on instalment sale agreements. Assuming the interest rate on your vehicle is higher than that of your home loan (being 10.9% per annum), we advise that you use the money parked in your access bond to pay off your vehicle in full. In doing so, you will immediately save on interest (the difference between the vehicle and home loan interest rates).
We are unsure of the structure of your bond and whether you have decreased your bond repayments relative to the additional funds housed in your access bond. So, although your home loan repayment may increase as a result of withdrawing the additional funds, you will still be able to free up an amount of R3 780 per month by paying off your vehicle. Importantly, this monthly saving should be channelled towards either an investment or back into your bond.
In addition, we would advise you as follows:
- An RA is the most tax-efficient way of saving. Depending on your tax bracket, bear in mind that all RA contributions will result in a refund from the South African Revenue Service (Sars), and it is unlikely that this return can be beaten in the market.
- However, you have indicated that you currently work in a volatile industry and we therefore do not recommend increasing your RA contributions by the amount you are considering (i.e. between R8 000 and R10 000 per month). Instead, we recommend that you begin rebuilding your savings in your access bond while keeping your RA contributions at a comfortable level. By building up the funds in your access bond you will reduce your interest and secure a guaranteed return equal to the interest rate on your home loan.
- At the end of the tax year, you can consider making a lump sum contribution towards your RA using the money saved in your access bond. You would need to ensure that you leave enough money in your access bond to cover any unexpected loss of income in the short term.
- Once your tax returns are completed and Sars issues your refund, this money can be placed back into your bond.
In summary, you would do well to pay off your vehicle as soon as possible and to retain your RA contributions at a comfortable level.
Continue to use your access bond to build up emergency reserves and to use it as a storage facility for any additional monies before committing them to an RA.
We commend your excellent money management and your commitment to attaining financial freedom.
Also read: Destroy your debt in 10 (not-so-easy) steps