Paying off debt versus saving THIS FEATURE IS SPONSORED BY PSG WEALTH

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During the pandemic, my personal finances took a hug knock as I had to unfortunately rely on using my credit card to pay for basic costs such as the rental for my office space over the course of six months, which cost R10 000 a month. This debt has accrued to R60 000, and I’m wondering if I should still be focusing on saving for retirement, or rather focus on paying off the credit card debt?

Name withheld

Marzél Swart, Wealth Adviser at PSG Wealth, Pretoria East, replies:

The pandemic has really taken its toll on many people, so my sincerest sympathy with what you have had to go through. According to a report by TransUnion on consumer credit, most people have had to fall back on credit to make ends meet. The interest rate on credit cards is customised to each individual, based on their credit profile and can vary between 8% and 18% per year. Depending on your rate, you can weigh that against an average expected investment rate about 8% per year.

We often tend to think that we must do one and then the other, but in some instances you can do both. Depending on your personal preferences with regards to debt, a combination of paying off the credit card while continuing to save for retirement is still an option. You can save for retirement from as little as R500 per month. Therefore, for some people, it is possible to still do both.

In the long run you want to be debt-free as soon as possible so that the growth on compound interest can work for you instead of against you. Albert Einstein was quoted saying: “Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it”. The compound effect of the loan’s interest is much more damaging since the rate is generally much higher. With that in mind, I'd advise you to pay off the credit card as soon as possible.

Where should I park R1 million?

I have recently sold my house. After all debts are paid, I will have R1 million in hand. I intend to use it after a year as I am currently very busy with another project. Please advise me on keeping it in a low-risk investment vehicle for the short term, while still earning a reasonable return.

Name withheld

Chrisley Botha, Wealth Adviser at PSG Wealth, Stellenbosch, replies:

There are several things to consider when looking for a lowrisk investment for your money, especially one that will provide short-term returns. The most important factors to consider are:

Inflation risk - the possibility that an investment’s value may decrease over time due to inflation.

Interest rate risk - the possibility that an investment’s value may decrease due to changes in interest rates.

Capital protection - the ability of an investment to provide some degree of “insurance” against losses.

Liquidity - the ease with which an asset can be converted into cash without affecting its value.

The safest investments for you are those that offer protection risks. Because these investments tend to be more conservative, they may not offer very high returns. However, given your short investment horizon this shouldn't be an issue as long as there's some sort of return on your investment and protection of capital.

With that said, I think you'll benefit from investing in a fixed-income type of fund.

Fixed income is an investment approach focused on preservation of capital and income and plays a pivotal role in the investment world, especially in volatile times. Choose a fund that is an interestbearing short-term fund which aims to beat cash or a short-term bank deposit, with full liquidity at short notice. These fixedincome funds are specifically designed for investors seeking returns higher than those offered by money market funds, with no capital loss over the short term.