Paying debt best bet – usually

WE DO NEED TO SAVE…THERE IS NO DEBATE ABOUT THIS.

pay down your debt” (thereby reducing net liabilities), before committing to medium- and long-term saving for retirement, or in continuing contributions to KiwiSaver for your kids after grabbing the $1000 kick-start?

IT IS IMPORTANT TO PAY DOWN YOUR MORTGAGE. NO DEBATE.

BUT IF YOU HAVE OTHER DEBTS ALONGSIDE WHICH ARE AT HIGHER INTEREST RATES, WHAT DO YOU DO? Examples include personal loans, hp, credit card debts, and car loans are examples of high costs.PAY THE HIGHER RATE DEBTS FIRST OR CONSOLIDATE.

Over the years debt repayment could make quite a difference to your liabilities situation and to individuals’ wealth.

A basic financial “rule” is: pay off debt as fast as possible – unless you feel confident that you can earn a higher return in an investment than the interest charged on the debt.

Paying 6.5 per cent on a mortgage while earning 3.5 per cent in a savings account leaves you going backwards. Generally you can’t make a return on savings – after fees and tax – that’s higher than mortgage interest rates without taking considerable risk.

However, there’s an important exception – KiwiSaver. The scheme’s incentives – the $1000 kick-start, tax credits of up to $1043 a year and, for employees, contributions from employers – boost the return so that for most people it’s higher than mortgage interest rates. If you are worried about risk, you can invest in a low-risk KiwiSaver fund.

It’s best for mortgage holders to contribute just 2 per cent of their pay to KiwiSaver – topping it up to $1043 a year if necessary, to get the maximum tax credit. Any further savings are best put into mortgage repayments or other high cost debts.

EMERGENCY FUNDS?