Making Lemons out of Lemonade
Q1 2018
If any of us anticipated we would hit the sweet spot in the investment world after the election of Cyril Ramaphosa in December 2018, you would have been excused for being bewildered and befuddled at the bitter time we’ve had since then.
A euphoric January was rapidly followed by a global stock market correction in February. The correction was not unexpected after the meteoric 25% growth in stock market prices in US Dollars terms during 2017. Rather it was the depth of the correction that surprised. From an anticipated 7% decline in share prices, they eventually dropped to a painful -10%. However, based on very good economic fundamentals, the markets nippily recovered and were on their way to regain all lost ground when President Trump started his uber bullying tactics – first with North-Korea over its nuclear ambitions, a threatened trade war with China, then meddling in Syria and now has Iran’s 2015 nuclear deal in his sights. No wonder then that the stock markets continued to struggle through-out March and April, despite the continuing good economic news.
Locally political uncertainty still remains the order of the day albeit at lower levels than witnessed during President Zuma’s tenure. The peculiar schizophrenic nature of SA politics continued with two steps forward and one step back especially regarding extremely important national debates on land expropriation and the mining charter inter alia.
The rapidly shifting winds of geopolitical events have thus far over-ruled a strong global economic recovery. One will be forgiven for assuming that there’s a determined attack on the good news out there – a case of when life hands us lemonade, we are trying to make lemons.
Should you be investing when you have debt?
If you have been investing while also struggling to manage your debt, you could be doing yourself a disservice. When you separate your debt obligations from your savings and investments, your debts could be eroding your overall wealth.
Conversely, if you implement a strategy that focuses only on paying off debt and ignores investing, you could find yourself vulnerable to unexpected events, as well as under-funding your retirement. Managing debt and investments is a double-edged sword, but there is a solution.
Successfully paying off your debts while growing your savings and investments requires a good financial plan and a balanced approach.
6 ways to balance your debts and investments
- Establish an emergency fund
Before you start accelerating your debt repayments, you should ensure that you have an emergency fund of at least R10,000 – R20,000. Most attempts to become debt-free are derailed by emergencies, which force people to access credit lines, sinking deeper in debt. Over time, you should ideally build this fund up to 3 to 6 months’ worth of net salary. - Use short-term savings to pay off short-term debt
By paying off your short-term debt with a money market savings account, you would effectively have a 18% return on your money. This is because short-term debt. Like you credit card are charged at ±25%, while your money market earns interest at 7%. 18% is the best return you could hope to get on a short-term investment. You can use the money you have paid on your monthly credit card payments to top-up your money market account. - Increase you short-term debt repayments
Using an additional R600 to pay off a 24 month loan which will cost you R800 per month over 2 years within just one year, you would have saved R2,000 in interest. The following year you can start putting extra money into longer-term savings as you now have R1,400 available (R600 savings and R800 debt repayment) - Cut 5 years off your bond
By increasing your bond repayments by just 10%, you will pay your home loan 5 years earlier. On a R1 million home loan, you will save around R420,000 interest and when interest rates go up, you will already by paying the new higher minimum repayment amount, so you will not have to change your budget to accommodate the increase. - But…..don’t put all your money in your home loan
It is not a good idea to invest all your savings into your home loan. Your house is not a retirement asset, rather it is a life asset that needs to be paid off over time. If you put all your money into your home loan, you may be debt-free, but you will have not have saved for your retirement. Putting all your money into your home loan is also a high-risk strategy as you are betting all your savings on one asset class, your home. You should diversify your savings into other asset classes such as shares. - Don’t ignore retirement funding
Even if you have debts to repay, make sure you continue to invest at least 15% of your monthly salary towards retirement. When it comes to retirement funding, time is literally money, because of the power of compounding.
Compounding can be explained by the following example. If you saved R1,000 per month from the age of 25 – 30 and never contributed again, you would still have more money for your retirement than if you contributed R1,000 per month from the age of 30 – 65. This is because, on average, your money doubles every seven years making those first years extremely valuable.
