Okay
Many comments on which course of action is better, and two diverging but valid points from the "2 million saved"
@Qui_Illustrati and physically emigrating dude
@LouisABC . Maybe the lesson from both of those recommendations is that the best course of action is the one that helps you sleep better at night because you understand the choices and made a choice that you understood was better for your risk appetite?
Mr Emigration talks about not paying off a depreciating asset faster(car) and he's somewhat right--but he ignores the pragmatic reality MOST people have. Mr Emigration might have been able to buy his first car completely cash, not everyone is able to. The reality, however, is that as a 26-year old, the likelihood of still needing a loan for a car is very real. Let's construct a realistic timeline. First job out of varsity at 20/21, you need a car, and if you are smart you buy your first car as a second hand clunker and with 90-100% finance as most people don't have the luxury of living rent free at parent's home to save a huge deposit on a car. After paying it off and wanting a better, maybe safer car at 26 with a family, the second car is a non-clunker if you've done proper saving and budgeting, and will likely be 30-50% financed, By the time you get to the third car you should be paying for that without financing.
This is the route
most people should follow. So yes, paying off a depreciating asset is not usually the right way, but for most people erasing a car payment is an easy win for saving cash to roll into the next car/investment that they can then pay for without using debt. Investment should be done realistically, not in a best case scenario. We are not machines, and the act of paying off debt faster AND investing is an excellent habit to cultivate. So yes, paying it off does not make sense in a pure financial sense, but it makes sense pragmatically.
As for the house saving-sure, paying off a house seems logical, and for most people it's the biggest asset in our personal portfolio. But the
opportunity cost of this money going into a house is what Mr Emigration and Mr 2 Million saved are arguing about. This is the cost of losing the gains the money put into the bond
could have made had it been put into something else, like equity. Mr Emigration is saying that simply putting the money into a bond means Mr 2 Million has not thought about the opportunity cost of not using that money elsewhere, and that he has potentially lost return over time. Whereas he might have saved 2 million in interest cost over 20 years, he also missed out on potentially making 4 million over 20 years had he stuck that money into the market--i.e a nett return on that money of 2 million more than the money saved. This is simply based on the idea that equities usually over a long period of time outperform property as an investment--and in South Africa we a probably due for a declining property market for the foreseeable future thanks to the fuckwits in charge.
HOWEVER, it's usually a mix of both that is REALISTICALLY achievable for most people. Had you put all your extra bond cash into local equity instead of the bond in the past 6 years, you'd have been better off sticking that money in a bond--the local returns have been absolutely SHITE and you are simply treading water, and there's no sign that the local market will pick up.
International return though, that's been better
oooookay. Onto the "not financial advice" advice for
@Anzarrah
Most of what pervy sage
@erosennin1111 has said is a great list of things you need to use for going forward-Read and understand everything he's said there.
However, i'd like to say that choosing an investment should be based on your personal comfort levels. A passive ETF is a low fee offering that returns the market performance. The fees of this are usually 2-3% lower than most active fund managed unit trusts. I go for passive simply because choosing the 15% of fund damager who outperform the market is a risk I don't feel like taking.
Another thing I want to say--you are saving R1000 for your kid. What vehicle are you using to save though? If you are saving this cash for them to use in 18 years, then perhaps think about opening a Tax Free savings account for them and investing in equity in there for them? Long term growth on this should outperform any other investment by the pure fact that the returns in this are not taxed at all and equity has outperformed many asset classes over time. Caveat--this money should not be touched, once it's in a TFSA consider it spent and not available to withdraw(you can withdraw it, but you reaaaalllly shouldn't until your kid is ready to use it--and even then they themselves should leave it to compound for longer). This is the power of compounding --if you were to dump R33k into his TFSA this year, by the time he is ready to retire at 55, this single contribution should give them a monthly retirement income of an equivalent of R10 000 in today's money (i.e, 55 year inflation adjusted amount equal to R10 000 in today's money)
A TFSA is a powerful savings and retirement vehicle for everyone, but ESPECIALLY don't underestimate how useful it can be for your kid. They have the longest TAX free compounding wealth creation potential of anyone in your family right now, use that and use it hard.
And thirdly: do you have an emergency fund? This is money you need, as it states, for unforeseen emergencies. This is small, Like excess payments, or big, like portions of a hospital bill that medical aid does not cover. Or simply for if you or your partner lose income from getting retrenched? Work out your total monthly expenses(literally everything essential and strip out all the rest), and try to set around at least 3-6 months of emergency fund in case shit hits the fan. This cash should be in a easily and quickly accessible interest bearing(32 day money market) or interest saving(Bond) account. For me, the most attractive option is currently Tyme bank as they have a 9% p/a interest rate on a max 100K investment, and it can get bumped up to 10% if you wait 10 days to withdraw. For most people, bond interest is higher than or equal to prime, so it makes sense to have an emergency fund in the bond access account. If you manage to get a cheaper bond that's lower than some investment returns, then you are flexible on where to stick it.
The rationale for an emergency fund is that if you start investing every scrap of disposable cash you may be illiquid when you need money, so then in order to pay for an emergencies you are forced to cash out some investment money or worse, take a personal loan, or not have access to your RA money till 55, you need a safety net of liquid cash available. Some people suggest credit cards are a stand in for emergency fund--and they are useful for it--but you need to have the capital somewhere in order to pay back the credit card debt in full, or you're stuck paying a huge interest bill.
Also, as for accounting for the "worst" emergency, something else you need to consider, since you have a family, is death and disability cover should anything happen to you or your partner. Figure out how much income would be needed to help cover the shortfall should either of your income generating capacity be cut short.
Lastly, the fees you are paying for investment products are a huge drag on the performance of your investments. You can find many passive products that charge 1% and under, so shop around and go for the one you can reasonably understand. If you want, I can give you a referral you to a few places? (
Disclaimer, you and I would both get something out of the referral)
If you don't wanna take up a referral, no probelmo: look at places like 10X, ETFsa, easy equities, SATRIX, SYNGIA,CORESHARES....
Also, not to shit completely on active products, but If you want an active investment product because you feel you agree with the fund manager and their returns/style, go ahead, as long as you make an informed choice.
Other than that, dude, you are 26 and starting WAAAAY ahead of a lot of people (including myself). You are already making the commitment now, and are not late to do this at all.
If I can say something though: really really really think hard about how much value a financial advisor brings to the table--95% of the time, they are simply selling a product and getting a return for doing very little. A 1 % advisor fee seems like a little when your investment is R10000...1% of 1 million is R10 000 a year for doing nothing but selling you something 20 years ago.
okay, Wall of text crits carbonite for 9000