Invest in debt clearance before retirement

Pieter van Zyl, Director at FinFive, shares his view on why debt clearance is the first step in a solid investment strategy

In today’s uncertain economic environment, planning for your financial future has never been more important. As the cost of living increases, so too does the amount of money required to secure a comfortable retirement.

Whilst it’s undoubtedly important to start making provisions for your retirement as early as possible, investing your money is likely to prove significantly less effective if you haven’t cleared your debts first.

Defining debt

Debt comes in numerous forms, and it’s important that you understand and assess the nature of your debts, and what expenses you are able to carry, before deciding on a feasible investment strategy.

Debt becomes significantly less manageable once your income has been reduced to a fixed level, and high-interest debt, such as that incurred via credit cards and retail store accounts, can end up severely compromising your golden years.

Some debt on the other hand, can in fact be considered good. Residential properties tend to appreciate in value, thus mitigating the impact of the interest you’re paying on your bond repayments.  Similarly, student loans generally offer low interest rates, and the interest paid is often tax deductible, meaning that you aren’t simply surrendering a portion of your monthly income to unnecessary interest accrual.

Prioritising your debt

Ridding yourself of all debt isn’t always a feasible solution. As such, it’s important to prioritise the various amounts you have owing before deciding on an appropriate debt reduction strategy.

Bonds are usually the most manageable form of debt, and can in some instances be used to help pay off amounts accruing higher levels of interest. Should you have equity available in your bond, it could pay off down the line to settle your more expensive debt by drawing on these funds.

It’s likely that your credit cards and retail store accounts will be those incurring the highest levels of interest, and these should be dealt with first. These accounts can incur anywhere between 12 and 25% in interest, and should you still owe money on these, it’s very unlikely that you’ll be making any profit from an investment.

Investment portfolios, even those dealing with higher risk classes like stocks, are unlikely to offer you a return of more than 10%, while high-interest savings accounts yield even less.

Should you owe R10, 000 on your credit card at an interest rate of 15%, you’d be far better advised to pay that off and save yourself R1, 500 in repayments, rather than invest the same amount in a high-interest savings account that is unlikely to yield more than R200 over the course of the year.

Debt repayments are an investment

Remember that, by paying off your debt, you are essentially laying the foundations of a solid investment strategy. By putting money towards your debt repayments, you are effectively freeing up funds that can later be used to create a more sustainable investment portfolio.

And whilst other investments could ultimately cause you to lose money in the long run, an investment in debt repayment is risk-free, and offers the benefit of being unaffected by market conditions and fluctuations.

Don’t deplete reserves

Whilst it’s important to try to reduce your debt as quickly as possible, don’t make the mistake of over-exerting your finances in order to expedite the process. By putting all your disposable income into your debt repayments, you leave yourself vulnerable to any unforeseen expenses that may occur.

In such an event, you’re likely to once again use a credit card to finance payment, effectively replacing old debt with new. So make sure to maintain some sort of emergency fund, allowing yourself a degree of financial flexibility as you work towards clearing your debt.

Spend now, save later

Ultimately, the quicker you are able to pay off your debt, the sooner you’ll be able to start truly saving for a secure retirement. Whilst it may involve more upfront expenses in the short-term, it can pave the way for a truly effective investment strategy, which, if given suitable time to yield returns, will leave you poised to enjoy your retirement years free of financial burden.

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