Make the most of the interest-rate cuts

There have been four consecutive interest-rate cuts since December last year. That means a lot more money in our pockets as the prime lending rate has been relaxed from 15.5% in December 2008 to 12% currently.

If you have an average-size home loan (R500 000), all these cuts mean that you now have over R1 200 extra in your pocket each month. That’s a sizeable R14 400 a year.

The question is: what are you going to do with the extra cash?

Sanlam Liquid’s René Roux gives guidance:

Pay off expensive debt first

If you were thinking of first paying off your home loan by continuing to pay the December rate of 15.5%, remember your debt is now only costing you 12%, while outstanding balances on your credit card and retail accounts can cost you up to 25%.

Our calculations show that an average consumer with debt totaling R7 000 on a few retail accounts, scored a mere R12 a month from the interest-rate cuts. This shows that you should cut this debt as quickly as possible to not only rid yourself of the debt, but potentially to free up even more cash for yourself every month.

The same applies to your credit card. Stop spending on it. Use your spare cash instead when you feel the urge to buy. This will stop future credit-card debt and make you think twice about impulse buying.

If you have to have retail accounts, always pay on time as not to incur extra charges.

Pay off your overdraft, personal loans

Your overdraft is likely to be your second-most expensive debt. This and personal loans can cost you up to 20% in interest, so it is wise to clear these as soon as possible. Also try to clear any debt you owe your family or friends.

Pay more on your mortgage

Once you’re satisfied with your short-term debt situation, try paying more on your home loan. This will save you time and money. By keeping your payment at R6 770 at the old interest rate of 15.5%, instead of the lower R5 505 at 12%, you will end up slashing 8.75 years off your original 20-year term of the loan, while in money you’ll save a whopping R408 470 in interest.

Seen from another angle, you can earn 12% on your investment, an interest rate you won’t find on any normal savings account.

Save, save, save

If you could save the extra cash, why not create an instant access savings account to act as a cushion in emergencies. The ideal is to keep three month’s salary in such an eventuality account. If you want to access your funds whenever you wish, a Sanlam Liquid Savings Account or Sanlam Liquid Debit Card is a good option. You can earn Money Market Fund interest rates on these accounts, currently offering more than 9%.

Your savings could pay for your children’s school fees, that well-deserved holiday, the renovations on the house and even that long-overdue car service.