Extinguishing Debt

[sabre_ac]

Would love some opinions on my situation.

20 something a few years out of uni working full time.

25k HEC's Debt
25k Car loan (At 10% interest over 5 years)
No Home loan
Decent Share portfolio


What should be my priorities?

1. Pay off Car loan at the high interest rate, higher than I could earn in a bank if I saved it.

2. Pay off HEC's Debt.

3. Save as much as I can for home loan deposit (Get into the market as soon as possible).

4. Periodically invest in the share market (Blue chip, diversify when possible).

At my current salary doing all is not really a priority.

At the moment..I am thinking in the following order.

4,3,1,2

 

[Papa G]

1,4,3,2

1. You have to pay off your loan and 10% is quite a high interest rate in this environment.

4. I think it's a fairly good time to be putting money in the stock market for some decent growth.

3. Relates to 4 in that your stock market gains (hopefully) can be used as the deposit for the home down the track. It's a riskier strategy than just saving the funds in the bank, but the potential for a bigger deposit in 1,2, 3 years time is much greater. Sure the downside is far greater, but you'd think the chances of upside would be greater in that period.

4. HECS. Pay it through your tax and you don't even notice it. It's always at a low interest rate. You only pay it if your making income and they won't chase you down like a bank. Always should be last priority.

 

[Karl Pilkington]

1. Pay off Car loan at the high interest rate, higher than I could earn in a bank if I saved it.

2. Pay off HEC's Debt.

3. Save as much as I can for home loan deposit (Get into the market as soon as possible).

4. Periodically invest in the share market (Blue chip, diversify when possible).

At the moment..I am thinking in the following order.

4,3,1,2

I don't know your exact figures etc and I'd need those to give you a real recommendation, but clearly number 1 should be the priority.

I'd be going gangbusters on the car loan because you don't get penalised for early payment (usually, definitely worth checking out) and the interest rate is huge.

If you could at least get it down to say, 5k, as a priority, the interest rate won't be as big a deal because the capital has been greatly reduced. But really, that needs to be your priority.

To offset that, there's nothing wrong with going into some blue chip shares in 2k increments if you feel the market is at a low point and will pick up (I'm yet to be convinced, working as a financial planner and doing my research, I still think the banks are in worse shape than they let on).

The HECS is probably the next thing I'd target rather than buying a house. I'm firmly of the belief the housing market still has a way to fall (especially if they remove the first home buyers grant) over the next two years. As unemployment climbs, the FHG is removed and interests rates rise again there will be a shitload of cheap properties available over the next two or three years unless the government decides to **** our country by going the Japan route of zero percent interest and stagnant economic growth. The thing with HECS is, its paid pre-tax I believe, so you don't really need to channel extra funds into it because you can't really default on it either if you lose your job.

After the car loan is gone, just save, pay the minimum HECS and buy increments of shares if you're aiming long term (you buy increments rather than large portions because it splits the risk across different trading days ie some days you'll buy at say $30, others at $32 others at $28 and it should even out so you don't get stung by buying solely on a day when the market is up).

Sure, with housing, you get the 14k from the government to buy now, but there's a strong indication imo that any house you buy will fall in value by more than 14k over the next two years anyway. Also, if you lose your job its obviously preferable not to have a huge debt tied around your neck that you need to finance.

Honestly, get debt free ASAP is the best advice I would give to young people. Maybe acquire some blue chip shares in small increments if you think they're undervalued, but DO YOUR RESEARCH (or you'll end up like those idiots that are whinging about brisconnect) and get advice if you're unsure. Don't borrow to invest at the moment imo. Cash is king right now, and at the moment you're negative in cash.

Debt without an asset (such as HECS or a car loan) is even worse than a mortgage. Clear the debt while you're still employed. I know it sounds dreary but nobody can be super-confident over their job at the moment. Prepare for the worst and you'll be well equipped (with cash savings, a secure blue chip stock portfolio and no debt) to take advantage if it doesn't eventuate.

p.s. not having seen your personal situation this shouldn't be construed as advice of any kind, this is just my general opinion on the general situation you have provided me. I am not responsible for anything that happens if you follow through with this opinion.

 

[sabre_ac]

Cheers guys for the advice

Deep down I knew increasing my car repayments was always the best option, just isn't the most exciting...

I'd still like to save for a holiday at the end of the year, so I might adjust my repayments with that in mind.

 

[Karl Pilkington]

Cheers guys for the advice

Deep down I knew increasing my car repayments was always the best option, just isn't the most exciting...

I'd still like to save for a holiday at the end of the year, so I might adjust my repayments with that in mind.

Mate, I'm in financial planning and in a similar situation (less debt though). Yeah its the boring option but it will pay off over time.

Definitely save for your holiday, life isn't all about dollars.

 

[Leper]

FWIW, and it's just my lame ass opinion, to borrow $25k to buy a car is not the smartest thing to have done in the first place.

It will cost you >$30k over that 5 years (OK, a little less if you increase the payments) by which time your $25k car is worth ?$10k.

For roughly the same nett outlay (although you would of course need a deposit), you could own a $300k investment property, which in 10 years time would be worth a lot more than $300k ($500k - $600k), irrespective of any short term correction some are speculating on (which I don't think will happen due to supply < demand, but that's a separate debate).

 

[Karl Pilkington]

FWIW, and it's just my lame ass opinion, to borrow $25k to buy a car is not the smartest thing to have done in the first place.

It will cost you >$30k over that 5 years (OK, a little less if you increase the payments) by which time your $25k car is worth ?$10k.

For roughly the same nett outlay (although you would of course need a deposit), you could own a $300k investment property, which in 10 years time would be worth a lot more than $300k ($500k - $600k), irrespective of any short term correction some are speculating on (which I don't think will happen due to supply < demand, but that's a separate debate).

We disagree on that, and you have to remember that over the course of a 300k home loan you pay an additional (approx) 350k in interest so even if its 600k in 10 years - and i don't think it will be in real terms - you're running at break even -

A car loan is a good introduction to debt management for young people. I feel sorry for the 18/19 year olds buying houses at the moment, they're headed for serious trouble. Buying a car is never going to ruin you financially or cause you a great deal of stress.

Realistically, the safest, least committed option is simply to rent for accomodation and put the difference between your rent and a home loan repayment into a diversified portfolio of blue chip shares.

 

[Leper]

No "you" don't pay the interest, your tenant does, maybe with a little help from the taxman.

But I'll leave the property vs shares debate to Bunsen Burner and others, as it's one of those circular arguments that's bounced around enough on here for me to bother with it.

I agree with your last point though, which wouldn't be a bad idea at the moment as the doomsayers gradually piss off into their holes.

 

[Karl Pilkington]

No "you" don't pay the interest, your tenant does, maybe with a little help from the taxman.

No, you pay it. The income from the tenant goes to you, then you pay the bank.

But I'll leave the property vs shares debate to Bunsen Burner and others, as it's one of those circular arguments that's bounced around enough on here for me to bother with it.

I don't really see it as an either/or argument, there are situations where both are better than the other. For a young person in the current economic situation, I'd be trying to avoid debt and buying small increments of shares with a long term goal towards buying property once the FHG dries up and interest rates start climbing alongside unemployment. the good thing about shares in this situation is that they cost nothing to service if you lose your job.

 

[Leper]

No, you pay it. The income from the tenant goes to you, then you pay the bank.

You know I meant "indirectly". No need to be a smart ass.

Play on.

 

[sabre_ac]

FWIW, and it's just my lame ass opinion, to borrow $25k to buy a car is not the smartest thing to have done in the first place.

It will cost you >$30k over that 5 years (OK, a little less if you increase the payments) by which time your $25k car is worth ?$10k.

For roughly the same nett outlay (although you would of course need a deposit), you could own a $300k investment property, which in 10 years time would be worth a lot more than $300k ($500k - $600k), irrespective of any short term correction some are speculating on (which I don't think will happen due to supply < demand, but that's a separate debate).

300k loan when I bought the car was roughly 2k a month repayments (Which I couldn't afford). Let's not forget that house would now be worth up to 10% less than what it was when I paid for it, I would currently have negative equity.

Even now I am hesistant about buying a house in the perth market, I've got dreams of travelling and working overseas...I don't see much value in buying a house which is unlikely to move in value over the next few years while wages are essentially frozen.

I'll save cash like mentioned, repay loans and maybe look at buying a house in 2011...The perth market I think still has a long way to fall.

 

[Karl Pilkington]

The RE market as a whole may pick up, who knows. But logic would have to say its the worst time to buy for a first home buyer, because there are so many other buyers forcing the price up.

I'm happy just being cash positive, debt free over the next few years - i might take out a small margin loan so I can increase my share purchasing power at some point - but my main focus is not to commit to anything I can't handle if I lose my job. Might sound paranoid, but I won't go bankrupt no matter what happens.

 

[dmc333]

How much is the car worth now?
Can you sell it and buy a shit box? Well not a shitbox, but grannies die every day leaving behind 1990, garaged Corolla's, with 50k on the clock.

Not the coolest ride, but I got myself one and it hasn't missed a beat in 7 years.