I’m 45. My only debt is an outstanding R1.6 million bond. I have €10,000 available per month. Do I keep paying? [this extra money] in my bond to settle it or should I do something else with the available money?
It’s nice that you have a healthy amount available as a monthly free reserve.
It’s an age-old discussion: should I cancel all my debts first and pay off my bond as soon as possible, or should I invest? My answer is simple: it depends….
To come to a more definitive conclusion, one needs to consider your overall current financial position. Do you currently have any investments, and if so, how much? Do you contribute to the pension financing, and if so, how much? Do you have access to emergency funds? Is there anything in particular that you would like to buy or do in the next five to ten years?
Without the information above, I’d like to make a few comments, some of which some people may find controversial:
- If you have accrued approximately four times your annual income in investments (both retirement and voluntary investments) and continue to contribute to investments, then allocate at least the full R10 000 to your bond.
- Your home should not be seen as an investment. Too many people value the real estate they live in too much, only to be forced to sell it when they retire. Don’t fall into the trap of thinking that you can ‘scale down’ in the future and use the price difference as part of your pension. It rarely works.
- Get rid of bad debts like credit cards, overdrafts and other forms of expensive debt before lowering 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 don’t contribute to the pension fund, allocate half of your free reserves to an annuity (RA) and invest the tax it South African tax authorities (Sars) reimburses you in a voluntary investment. In your situation, assuming that you pay 30% tax, a contribution of R5,000 RA means that your tax is reduced by R1,500 per month, which you can invest in a voluntary investment. In fact, you turn R5,000 into R6,500 every month – you won’t get a better return on investment than that.
- Invest the balance of your free reserves in your bond. Should your bond yield rise, as we expect over the next two years, you can withdraw money from your voluntary investment and put it into your bond if your bond repayment becomes too high.
I hope this has helped.