Paying off debt a priority
Some financial advisers are recommending clients put extra money into saving, rather than paying off debt first. Retirement Commissioner Colin Blair offers another view.
Tuesday, March 17th 1998, 12:00AM
Some financial advisers are recommending clients put extra money into saving, rather than paying off debt first. Retirement Commissioner Colin Blair offers another view. Imagine this: You have just had a pay increase, or come into some extra money unexpectedly. Should you use that extra money to pay off your debts more quickly, or should you begin a retirement savings scheme?
Some financial advisers will argue in favour of beginning a savings scheme, but in most cases, this advice is not in the best interest of the consumer.
Generally, the interest rate you pay on debts such as mortgages and credit cards is higher than the after-tax, after-fees interest you would earn on savings schemes. So in purely financial terms it is better to concentrate on paying back debt, before you begin to save.
Even a savings scheme offering very high interest should be considered very carefully, as it is likely to carry a high risk, and may not be a wise financial planning option.
One possible exception to the "repay debt before you save" rule is employer-subsidised superannuation schemes. The subsidy can have the effect of significantly increasing the return to the saver, making it a very valuable savings tool. Also, many people feel more comfortable if they have available a small pool of savings to cover unexpected emergencies - and that’s a reasonable objective.
What we’re really talking about here is the concept of net worth.
"Net worth" is an economic and common sense measure that is reached by subtracting total liabilities (everything you owe) from total assets (everything you own).
In planning for retirement, using net worth as a measure of the overall financial position, and setting goals for future net worth, is more worthwhile than concentrating only on debt or only on savings, as it gives a more complete picture.
A long term strategy to increase net worth will, in many cases, involve paying off debt, particularly high interest debts, before starting significant savings plans for retirement.
A time to save
Having said that, it is true that there comes a time, once debt has been cleared, to start serious saving, rather than building up further debt.
Once the mortgage is paid off, it’s time to get serious about starting a retirement savings plan. Putting most or all of the money that had been going into mortgage payments can quickly build into a significant retirement savings fund.
Colin Blair is the Retirement Commissioner.
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