YOUR MONEY: Pay off debt, or invest?

Question:

I have a home loan, a car loan and credit card debt, as well as some savings. Should I use my savings to settle my car and credit card debt, or is it better to keep my savings as they are, and continue paying off my debt in monthly increments?

— Jason S

Answer:

When it comes to debt vs investing I always recommend trying to prioritise both throughout your lifetime; don’t make the debt payoff a priority over your portfolio and future wealth planning.

When we reach retirement we want to be debt-free. But we also need to have an investment portfolio of sufficient size to be able to provide a monthly income for the next 30-40 years. It won’t help much having no debt but also not having enough cash to live on.

Ideally we want to keep debt low. Credit card debt is expensive money — try to stay away from this snowball effect. In reality, most households will always have some form of debt — credit card, vehicle financing, home loan and the like. A vehicle is not an asset, it’s an item that depreciates in value, so I wouldn’t prioritise this.

In a high interest rate environment, all debt places much more pressure on any household. In the past few years the increase in rates almost doubled the monthly expense for those with home loans. 

At the same time, most diversified portfolios — including equity exposure — are outperforming the high interest rate environment. By prioritising your investment portfolio throughout life you benefit by having time in the market and from the compounding growth effect.

When it comes to investing, time is your greatest asset, and it takes a lot of pressure off how much you need to invest contribution-wise. Remember, we need to invest roughly 15% of our incomes for 40 years to be able to retire comfortably one day. We don’t really have time to lose on this.

Many people try to prioritise paying off their home loan or vehicle for a few years, and before you know it, it’s 10 years later and you’ve just lost 10 years in the market.

Think of it this way: if we were to assume a monthly investment of R5,000, increasing 6% annually and earning an average return of 10% — after 10 years we have R1,258,591; 20 years later we are on R5,518,407; and over 40 years it’s R54,823,366.

Now imagine you focused only on paying off debt for 20 years ...

The reality is, the vehicles we buy and the homes we live in are unlikely to remain the same forever. Our circumstances and needs change, so we normally end up buying different vehicles and homes and restarting the debt cycle anyway.

Elke Brink is a wealth adviser at R21 Wealth Management, Stellenbosch

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