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 Once a week, we post a question on the site that's come from one of our readers. This week, it's about paying off debt:
Question:
Hi Gareth,
I currently own a flat in PE and a house in cape town, while still paying off my car. I want to start my own business in about 4 years time but first want to pay off my car and property bonds. I'm currently employed as an engineer so i'm not starving.
Even though it makes sense to pay extra money for the bonds first due to compound interest, I feel that i should first pay off my car by the end of this year, then use that money and then concentrate on my bonds. Which option is the best?
Regards,
B
Answer:
Hi B,
That's a great question - and a position many people find themselves in...
My advice is, yes, pay off the car first. The reason for this is that, because vehicle finance is generally over a shorter period of time than a mortgage bond, the interest rate is generally higher (can easily be a difference of 5-8%). When paying off debt, the golden rule is always to pay off the debt carrying the highest interest rate first, and then once that's paid off, pump the excess into paying off the debt with the next-highest rate (and so on and so on).
That basically answers your question, but there's a bit more I'd like to add: You mention that you want to start your own business - and I'm assuming you'll need some capital to start it with? While you should definitely pay off your debt as fast as possible, try and put away a little something every month as well towards your 'start-up fund'. It might not pay as much interest as you'd be saving by putting it into your debt, but it's more the principle: If you go according to plan, and pay off your debt in the next 4 years, but have no savings, then what have you got? No debt, yes, but also no saved-up capital to throw around. Try and strike a balance between reducing debt and saving up a lump sum - the personal reward you'll get from seeing a lump sum growing (something positive) could easily outweigh the feeling from reducing debt (something negative). Basically, whatever situation you find yourself in, always try and put something away every month, for the future...
Regards,
Gareth |
Comments
Ultimately, it comes down to personal preferences, attitudes towards debt, etc. Using your bond as a place to draw some start-up capital can be a good idea (as the interest rate would generally be lower than a business loan); but if your aim is to have zero debt, then it wouldn't necessarily fit in with your values. Which is where a savings account would come in. But, as you've shown, there is definitely more than one way of doing it :)
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