You find yourself in the (lucky) position of sitting with an extra couple of Rands at the end of the month, and your mind starts to drift about what your options are. An age old questions which many individuals face is how to make the best use of your increased disposable income.
If you happen to have a house with a mortgage, we are of the opinion that you have the following two options:
Option 1:
Increase the monthly payment on your home loan, and redeem your bond earlier. After the bond is paid off, you can invest all of your disposable income into retirement funding.
Option 2:
Keep your bond payments the same and invest your additional disposable income into a retirement funding investment.
To compare these two options, we make some assumptions which apply to both scenarios:
Firstly, we’ll look at what your bond repayment schedule will look like with an increased payment of R 4,000 per month. We see that your bond will now be paid off in January 2020, 4 years earlier than initial repayment schedule.
Next, we’ll look at the growth of the balanced retirement fund:
- Option 1: R 4,000 will be invested from today until the bond is paid off.
- Option 2: The balanced retirement fund will be started as soon as the bond is paid off with R 4,000 plus the bond payment amount of R 9,662.9
The final investment values will be R 615,932 for Option 1 and R 798,180 for Option 2.
It should also be noted that we calculated this on a fixed rate of 10%. We currently expect interest rates to rise in the short to medium term, which will significantly increase the amount you pay on your bond.
The conclusion we make here is that you will be better off to pay your bond as soon as possible. In doing so you will make compounding interest work for you, rather than fighting against it.
The above example should serve as only that. An Example. Each client’s situation is unique and we urge you to seek out professional financial advice for big decisions such as these.
