Author Topic: TFSA vs Homeloan  (Read 7080 times)

conradl

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TFSA vs Homeloan
« on: February 28, 2016, 07:49:17 am »
Hi Guys,

I have an interesting scenario. I need to decide whether I put 30k into the TFSA for my wife or our homeloan. If I put the 30k in the homeloan, the interest component is reduced by R300 (which is reducing but quick calc is about R2800 p.a) which has a significant compounding effect over the lifetime of the loan. Whereas a 3.7% dividend yield (equates to R1100 p.a.) and the hope that the DIVTRX (I want to take advantage of the 15% divvie tax exclusion) does not come close to the interest saved, one must hope that the Divtrx does the growth part. I'd reinvest the dividends back into DivTRX. So this is a principle of negative compounding (paying less interest) vs positive compounding (divvies and share growth). Is there anything I'm missing thinking that makes my argument invalid? SimonB makes it sound like a no-brainer but I dont think it is as simple as that if you have a homeloan?

Your input is much appreciated?

Conrad

Fawkes85

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Re: TFSA vs Homeloan
« Reply #1 on: February 28, 2016, 11:05:49 am »
I am very much extremely anti debt so I would put it into getting rid of the debt. A lot of financial advisers, in books I have read, say get rid of your debt first and then invest. I agree.

Mr_Dividend

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Re: TFSA vs Homeloan
« Reply #2 on: February 28, 2016, 06:15:22 pm »
Bird in the hand vs. two in the bush?

Personally, I think cash should be added monthly into the TFSA - I did the lump sum thing last year and have regretted it.

How about R10K in the TFSA to kick start it and R20K in the homeloan?

gcr

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Re: TFSA vs Homeloan
« Reply #3 on: February 28, 2016, 07:09:02 pm »
Conrad - to me it is important to decide on a few issues:-
* Your age
* Size of bond
* What your long term investment objectives are
* Whether you are just parking R 30,000 off for a short period
* Can you live on your present salary and service your existing debt
Once you answer these questions then you can set a strategy for your long term wealth creation, so if your choice is to invest in the JSE then you need to understand that investing is long term and that volatility will be around for some time especially in this country where unfortunately political decisions can have devastating consequences on share prices and exchange rates
Just take time out to sit in a rocking chair and go through your options in your mind to get a crystal clear long term view with strict objectives and timelines
Not everything that counts, can be counted, and, not everything that can be counted counts - Albert Einstein

conradl

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Re: TFSA vs Homeloan
« Reply #4 on: February 29, 2016, 06:57:10 am »
Hi guys,

@Mr_Dividend, why do you regret the once off thing?

@gcr, I'm currently 33 but I've been investing in the JSE for almost 10 years already so I understand all of what you have stated in your post. So I have a portfolio of shares in SA and a small one on Webtrader (offshore).

The thing that made me a bit weary is the fact that people say its a no-brainer to use the TFSA. To me it's all about a person's current circumstances, ie current debt (ie homeloan is the only debt I have). So my first instinct is as per Fawkes85, service the debt first and that's the decision I've committed to. I was wondering whether I was missing something blatantly obvious...

gcr

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Re: TFSA vs Homeloan
« Reply #5 on: February 29, 2016, 08:33:42 am »
 Conrad - now knowing a bit more regarding your financial circumstances it helps.
If I was in your shoes I would bang the R30,000 into the home loan - it reduces capital but also builds up a reserve which you can access at a future time when needed - interest rates are likely to increase by at least 1% this year (more if we end up with a sovereign rating of junk). You have plenty of years to build up a TFSA but if you don't have a tax problem now I would buy more shares.
If the market drops over the next 18 months you could always access your bond account and buy shares. If down the line you start having tax problems then you can look to a TFSA to get some tax relief.
I think Gordhan played a cunning trick in the budget (my view entirely) he only neutralised 60% of bracket creep for the tax year and so is forcing citizens to take up a TFSA to get the additional tax relief.
Anyway I think you know what you want to really do with the funds
Not everything that counts, can be counted, and, not everything that can be counted counts - Albert Einstein

Mr_Dividend

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Re: TFSA vs Homeloan
« Reply #6 on: February 29, 2016, 09:30:54 am »
Conrad - just bought at the peak - so have been pretty much in the red for a year, would have worked out better had i put the money in monthly.

Patrick

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Re: TFSA vs Homeloan
« Reply #7 on: February 29, 2016, 10:12:35 am »
@Mr Div, we all bought at pretty much the market peak, but statistically that is the best way to get most returns. Dollar cost averaging has been shown to fail almost every time.

@Conrad, since you already have a portfolio, what I would do in your shoes is put the R30k into your hometown, then sell R30k of your shares and put that into your TFSA. It's what I advise anyone to do that has money in a regular unit trust or trading account.

Mr_Dividend

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Re: TFSA vs Homeloan
« Reply #8 on: February 29, 2016, 11:57:56 am »
@Mr Div, we all bought at pretty much the market peak, but statistically that is the best way to get most returns. Dollar cost averaging has been shown to fail almost every time.

@Conrad, since you already have a portfolio, what I would do in your shoes is put the R30k into your hometown, then sell R30k of your shares and put that into your TFSA. It's what I advise anyone to do that has money in a regular unit trust or trading account.

Sure, in a bull market you are right - as we where when we bought our TFSA. but what market are we in now? Have the bulls taken over? Personally, for this year, will be adding to my TFSA monthly - will be switching to ABSA though.

czc

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Re: TFSA vs Homeloan
« Reply #9 on: February 29, 2016, 01:23:11 pm »
I've been pretty aggressive with my homeloan. With the extra payments every time the interest rates have gone up my repayment has gone down. But I did neglect the TFSA. So my entire extra payment for march went towards the TFSA.

But its a question I've often pondered upon. All the websites refer to the low interest rates in America and how it makes sense to not pay up the cheap loan. But our situation here is high interest rates.

MoneyChief

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Re: TFSA vs Homeloan
« Reply #10 on: February 29, 2016, 02:43:14 pm »
If you cannot decide, then go 50/50. If you fill up the TFSA to the max (R60k X 50%=R30k), then put the extra in the home loan. Simples.

conradl

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Re: TFSA vs Homeloan
« Reply #11 on: March 01, 2016, 09:12:05 am »
Thanks for everyone's input, much appreciated  ;D

czc

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Re: TFSA vs Homeloan
« Reply #12 on: March 01, 2016, 08:20:31 pm »
So what are your thoughts now? It's a new tax year.

conradl

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Re: TFSA vs Homeloan
« Reply #13 on: March 02, 2016, 06:22:20 am »
The wife and I are going focus on the homeloan. Everytime I look at the AccessBond i see how much interest (and its not really that much anymore), I think that is money the bank is taking away from me... When one thing is done, another comes up, ie saving for my wife's next car (drives a 2005 vehicle with zero issues so far, safety is a concern for her  :'(). But I can't complain, at our age we are frugal with our money and well ahead of the average 35 year olds I think

Nios

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Re: TFSA vs Homeloan
« Reply #14 on: March 03, 2016, 12:01:50 am »
Was in the same boat as you and we chose to pay bond off first in 5yrs. Do the maths and calculate exactly what interest you are really paying.

A tip and something that helped us in tricking ourselves into seeing progress was every month we paid extra into the access bond was to reduce the installment accordingly based on the outstanding balance so you actually get to see the return you're "earning" every month you see the reduced installment debit order come off your account.

What are your future goals, bond balance, kids, other debt etc?