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Should I pay off my bond or smaller debts first?

There are certain strategies that can be implemented to pay off debt in a strategic manner.

Comair has just been liquidated and I’m left reeling as to how to go about saving my house. I need advice on whether it’s a good idea to pay off my bond and be left penniless waiting for UIF or pay off my smaller debts and try and invest whatever is left?

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Thank you for your question. Firstly, I’m sorry to hear about your job loss. When it comes to paying off debt, there are certain strategies that can be implemented to do this in a strategic manner.

Option 1:

Make a list of your debt, starting with the debt with the highest interest rate and ending with the debt with the lowest interest rate.

While paying off the minimum amounts on the debts at the bottom of the list, focus your energy and resources on the most expensive debt with regard to interest.

Because the interest will add up here the quickest, it’s a good idea to nip it in the bud and pay it off as fast as possible. Once this debt is paid off, take the monthly instalment that you paid on that and add it to the instalment of the debt now ranking the highest in terms of interest.

Every time you pay off the debt, you’ll notice that your instalment for the next debt gets larger, because the instalments that you used to pay off your previous debts will now be focused on the next. It should lead to a snowball effect, and you should be able to eliminate the debt faster and faster.

Option 2:

With this method, list your debt based on the size of the debt starting with the biggest amount. Once again, you still pay the minimum on the other debts, but you focus your energy on the first-ranking debt. This approach will make the big amount look smaller faster, which some people find more motivating.

Making a list of all the debt could be very overwhelming. When it comes to your house, if possible, keep paying the minimum amount if you are interested in keeping the property.

Invest or pay off your debt

Having both debt and savings is a reality for most people, and very few people pay off their debt before they start saving.

The key here is to focus on the interest rate of the debt and to consider what the potential return would be on the investment. Also, if you have a lot of debt and it’s starting to become overwhelming, it would be better to pay off your debt first so as to keep your stress levels in check. Further, keep in mind that having too much debt can make future borrowing opportunities difficult. Furthermore, having too much debt to service reduces your opportunities to invest for the future.

While your mortgage bond is generally a cheaper form of debt, paying off your bond and being left penniless while waiting for your UIF payment can be stressful. Remember, you will need to ensure that you have some liquidity while you seek alternative employment.

As such, taking the above considerations into account, the ideal would be to find a balance between managing your stress, settling expensive debt, and ensuring that you can cover your living expenses until you find employment or until UIF pays out.

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Besides conventional debt as in capital and interest service, there are a bunch of monthly paid things that drain cashflow exactly as much as debt. Reduce your cel phone and home broadband, shed dstv, have a look at your short term insurance, scrap home cleaning and gardening service over DIY, etc etc. those could shed R4k a month, put that into your debt payments.

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