Friday, July 25, 2008

Financial Planning Talk (5): Start the Financial Plan – Pay Off the Debt

After setting the goals, we can start to come out with the financial plan. The financial plan should be aligned with the goals. For each short term goal, we need to plan accordingly to achieve the particular goal.

Typically, the first thing in our financial plan should be paying off all the debts, if got any. It is glad that you are free of debts. If you have any, paying off the debts should be the first goal that you must achieve.

The rule of paying off debt is, pay off the debts with highest interest rate first, and pay off the debts with lowest interest rate last. Normally, credit card debts have the highest interest rate, which is 18% p.a. If you have credit card debts, you must pay off all your credit cards debt as soon as possible. Stop to swipe your card, purchase using cash. Do balance transfer and negotiate with banks to pay off the debts in a certain period with lower interest rate.

Besides credit card debts, personal loans are the second high interest rate loan, then followed by car loans and housing loans. Normally, we will pay off the car loans and housing loans in long period, such as 5-7 years and 20-25 years respectively.

There is something we must bear in mind. Never invest your money while you have debts, unless the return of the investment is higher than the debts interest rate. For example, credit card debts annual interest is 18%, while FD interest rate is only 3.7%, unit trust investment gives annual return 8-10%, and stock investment gives annual return 12-15%. So, we should always pay off all the credit card debts before we do investment or saving.

No comments: