4. Should I withdraw my EPF to pay off my debt?
This is a frequently asked question.
For the past 5-6 years, EPF has paid out 6+% in dividends per annum to contributors. Hence, the answer to the question above is: ‘What is the effective interest rate of the debt which you intend to settle?’
If it is for an outstanding credit card debt that charges 18% a year, it is worth it.
If it is for an outstanding personal loan that charges 7+% a year, it is worth it.
If it is for an outstanding car loan that charges 5+% a year, it is not worth it.
If it is for an outstanding mortgage that charges 4+% a year, it is not worth it.
What if you have saved up or have excess cash in the bank? Should you settle your liabilities with this excess cash? That leads us to:
5. Age, life goals and purposes
Let’s say, you are below 45 years old and have accumulated RM100,000 in cash today. Would you choose to:
• Pay off RM100,000 worth of mortgage?
On the positive note, you save on its interest expenses. But, on the down side, it does nothing to reduce your DSR for your monthly repayments would remain the same.
Also, you forfeit an opportunity to invest in a new property for the RM100,000 can be used as capital for the down payment, various fees of transaction and renovation costs.
• Pay off RM 100,000 worth of car loan?
Congratulations! You now own your car debt-free and your DSR is further reduced, hence, boosting your loan eligibility.
With that being said, it costed you RM100,000 in investment capital. Is that a good trade-off?
• Invest RM100,000 in stocks or real estate.
This makes sense only if you do not have high interest debt and are investing mainly for predictable cash flow, not capital gain which is unpredictable.
You can use your cash returns to offset recurring interest payment from both mortgage and car loans.
• Keep RM100,000 in FD accounts.
Today, FD rates are at 3% per year, which is a 1-2% difference from the interest rates of mortgage and car loans. If you keep your money in FD, you have the flexibility of choosing how you spend or invest your money in the future at a cost of 1-2% (RM 1,000 – RM 2,000) per annum as compared to using them to pay either your mortgage or car loan.
If you remain clueless on how to use the money, that’s okay. The RM100,000 can serve as a buffer or reserve to service your debt payments for many months or years to come.
Conclusion:
If you wish to be rich and attain financial freedom faster, do:
• Use low interest debt to buy assets that pay cash flow and grow in value.
• Avoid and eliminate high interest debt.
• Stretch debt repayments to a longer tenure.
• Keep DSR at manageable levels.
• Boost income to reduce DSR instead of aiming to be ‘debt-free’.
This article was published in kclau.com
Ian Tai is the founder of DividenVault.com, a platform that empowers retail investors to build wealth through ownership of fundamentally solid stocks that pay ever-growing dividends year after year.