I have an overdraft of R130 000 which was used as a deposit on my home. I owe R500 000 on the bond and have paid off R400 000 (original price R1 million).
I am 58 with minimal retirement savings and clear around R50 000 per month after deductions. I have no other debt other than bond and living expenses (around R20 000).
Should I now concentrate on paying down the overdraft or adding extra to the bond payment, or a bit of both?
You are earning a good salary and your living costs are under control. That is a good position to be in. It sounds like you have the capacity to apply some of this monthly excess income to reduce your debt. Your question is ‘which debt do I tackle first?’
Generally speaking, it is best to try and settle the more expensive debt first. In your case, I would assume that the overdraft has a higher interest rate than the bond. I would therefore apply any extra funds to settle the overdraft as quickly as possible. I would do this as aggressively as possible until the overdraft is settled.
It may also be worth looking at whether your bond has an access facility. You could then use R130 000 from your bond (at a lower interest rate) to settle your overdraft (higher interest rate) in one go. That way you are consolidating your debt in one place with a lower rate and will probably pay less bank admin fees. Importantly, if you go this route, try to keep the ‘overdraft portion’ of the bond repayments as high as you can, so that you rid yourself of that debt completely and as soon as possible. In other words, don’t keep your total bond repayments at the same level they were before you consolidated the debt.
You mention that you have minimal retirement savings. So once your overdraft is settled (either directly or through your bond), I suggest you focus both on ensuring your bond will be fully repaid by the time you retire and accumulating some retirement savings.
Start off by working out how much you need to repay on your bond every month to ensure it is fully repaid by the time you retire.
Interest rates are quite low at the moment so it’s a good time to try and get ahead of your bond repayments, by paying more than the calculated amount. The best way to do this is to set up an extra monthly payment or increase the monthly debit order going off your current account to pay the bond. That way it is done automatically a day or two after you are paid. It is much better doing it this way than waiting for the end of the month to ‘see how much is left’ to transfer to your bond account. Behaviourally we just aren’t hardwired to get this right, so rather trick yourself and pay the excess every month automatically.
At the same time that you’re working on repaying your bond, start setting some retirement savings aside. By saving into a retirement product like a pension/provident or retirement annuity (RA) you effectively save pre-tax money. In simple terms, if your tax rate is at 40% and you contribute R10 000 into an RA you will receive R4 000 (40% of your contribution) back from Sars. This means you end up saving R10 000 into your retirement annuity and it only costs you R6 000. If you can afford to, plough the tax saving back into another investment vehicle. That way you’ll be saving R14 000 a month at a cost of R10 000 a month.
A certified financial planner professional will be able to help you establish how much you should be saving now to ensure you can maintain your lifestyle in retirement.