Wednesday, August 1, 2012

Should you reduce debt first or start a savings plan to buy a house?

Scenario: Clients have several credit card debts and a personal car loan debt. Both husband and wife have good paying jobs and no children so have a good surplus cash flow position - they just have not been disciplined with where they money goes.

The new goal is to buy a home and get out of the rental system.

So the dilemma: do they pay off the existing debt first at a faster rate or do they keep making the required payments and put the surplus cash into a savings account for the house deposit.In this situation, I assisted the clients in developing a strategy to make additional repayments to clear the credit card debts as soon as possible whilst also starting a small savings plan.

Normally I would recommend you clear all debts first before putting money into savings as the interest that you are charged is always at a higher rate that what is offered on savings accounts. In this case however, the credit cards can be cleared within 18 months and a small savings plan held in place over a few years will give greater lending confidence when the time comes to seek a home loan. For these clients, they can clear credit card debt, reduce car loan to manageable level and save up a house deposit within 3 years.

Everyone's situation is unique so if you know anyone who has this dilemma - let them know that in seeking professional advice they too can find the best solution to meet their goals.