I am 45. My only debt is an outstanding bond of R1.6 million. I have R10 000 available per month. Do I keep on paying [this extra money] into my bond to clear it or should I do something else with the available funds?
It is great that you have a healthy amount available as a monthly free reserve.
It is an age-old debate: Must I first clear all my debt and pay my bond as soon as possible, or must I invest? My answer is simple: it depends ….
In order to come to a more definite conclusion, one must take your overall current financial position into consideration. Do you currently have investments, and if yes, how much? Do you contribute towards retirement funding, and if yes, how much? Do you have access to emergency funds? Is there something special that you would like to purchase or do in the next five to 10 years?
Without the above information, I would like to make some comments, some of which some people may find controversial:
- If you have accumulated around four times your annual income in investments (retirement as well as voluntary investments) and are continuing to contribute towards investments then by all means allocate the full R10 000 to your bond.
- Your residential property should not be viewed as an investment. Too many people place too high a value on the property they live in only to end up being forced to sell it when they retire. Don’t fall into the trap of thinking you can ‘scale down’ in the future and use the difference in price as part of retirement funding. It rarely works.
Get rid of bad debt like credit cards, overdrafts and other forms of expensive debt first before reducing your bond.
- If you do not have a healthy investment portfolio allocate 50% of your free reserves to an investment. A tax-free savings account is a good option with R3 000 per month (maximum allowed per year: R36 000).
- If you do not contribute towards retirement funding allocate half of your free reserves to a retirement annuity (RA) and invest the tax the South African Revenue Service (Sars) refunds you in a voluntary investment. In your situation, if we assume that you pay tax at 30%, then a R5 000 RA contribution means your tax will be reduced by R1 500 per month, which you can invest in a voluntary investment. Effectively you will turn R5 000 into R6 500 every month – you will not get a better investment return than that.
- Invest the balance of your free reserves into your bond. Should your bond interest rate escalate, as we expect it to over the next two years, then you can draw funds from your voluntary investment and plough them into your bond should your bond repayment become excessive.
I hope this helped.