Advise on Clearing Hutang(s)/Loan

[matthewades]

Salam and greetings to sifus, second time posting here on this sub. Been an avid reader all this while.

I am 30(M, Bumi) married with a kid in KL (Moved recently).

I am Netting around 7K Monthly (Approximately -10% from my previous job, with 20-30% higher cost of living; basically living paycheck to paycheck with 300 ringgit to spend for my own) and would like to embark on a journey to straighten my financials post Covid, where i had to relocate my family twice within short period (KL-Borneo-KL).

After serving my new company for a year involving multiple panic attacks and an episode of depression, i am expecting to get a sizeable amount of variable bonus from my company this month (Base case: 40K Nett, but with possibility to reach up to 70K Nett depends on my actual appraisal results). Will get back to this shortly.

My short term target (1-2 years): To rebuild my emergency savings (Target: 30K) which i had fully utilized previously.

My long term target (>3 years): To buy my first house latest by 35 Y/O. The reason behind this is, i want my kid to grow up in a proper environment possibly outside of KL's hustle and bustle.



Here is my dilemma, should i save my bonus and put it in my emergency fund for a peace of mind, and continue to live frugally and paying off my monthly expenses and act like the bonus doesnt exist (Park all in ASB) (OPTION A).

Or

Should i clear my hutang/loan/EPP first and assuming i can compress/maintain my monthly cashflow as per last year use the amount to build the emergency funds/savings basically from 0 (OPTION B).

Some of the things that i think can be paid off in full

Items
Monthly Cost
Total Cost
Remarks

Car Payment
525
28,000
3.2% Interest. Checked with my Bank, they are willing to give discount of around 10% if i were to clear off my account.

Education Loan
250
9,000
0% Interest. Been paying since i got my first job.

Various EPP Committed Prior and During Covid
1,200
~15,000
0% Interest. Some of the items are Necessities and some are luxuries that i think was avoidable.

Cash Gift for Spouse
-
10,000
I think it is only fair i reward my spouse for her continuous support through the hardships we had faced this past year.
TOTAL ~60,000

Or

Should i go down the middle, clear some of the loans, essentially converting the monthly amount to savings diligently and park what ever is left in ASB(Option C).

 

[eng]

@matthewades I smiled when i read you wanted to buy a house because you want your kid to grow up in a proper environment. And, also nice touch of class from you for rewarding your spouse. Hats off.

If you are risk adverse, you can put your bonus into a money market fund for liquidity purposes. Or, if you are feeling daring, you could use that bonus and buy some dividend stocks that pays out 5-7% annually.

I think trying to clear your loan isn't worth it. A 3.2% interest is easy to beat. Most dividend stocks pay more than that anyways.

 

[matthewades]

@eng Hey, thanks for the kind advise. I really appreciate it. Most of the advise so far are leaning to option A/C.

My spouse and kid had been the only reason i am still running in this rat’s race. Haha, if given the chance how i wish i can retire early goyang kaki back in my hometown. Thanks again!

 

[lukemaster130]

@matthewades There’s something about getting a peace of mind when you clear off your loans. Sure, interest is around 3 and fd (easiest lowest risk) is at 4. Net gain 1% from doing nothing no research etc.

But here’s the thing. It won’t provide you your peace of mind. And if I were you I’d pay off All my debts first. Get that peace of mind then rebuild.

There won’t be something lingering inside your head knowing you’re still owing someone or a big ticket loan you can’t wait to pay off.

Cheers

 

[matthewades]

@lukemaster130 Hey! Thanks for the advise! Yeah my debts had always been one of the main stressors in my life currently. I was thinking to use the amount cleared and any additional income to speed up the rate of reaching my personal goal.

 

[idrys]

@matthewades I would go for option A. You still have some funds and liquidity yet u know u can pay off your loans anytime. As long u don't actually spend your bonus. I would park it in ASB

 

[matthewades]

@idrys Hey friend, thanks for the advise! That had been the way i had been saving so far. However, i had never been able to accumulate much as large sum saved earlier of the year (10-15k) would diminish by end of year due to emergency and what not.And this had been happening in a never ending cycle for these past few years.
Just like what people always say, the first 100 is always the hardest..

 

[roman_k]

@matthewades Hey friend, not sure if this is applicable to you, but I used to have the same issue where all my saved up money would be almost gone by the year end.

What I used to do with my salary (zaman jahil):
1. Pay the main payments (house, car, parents)
2. Put aside a nice solid amount in savings (RM1k)
3. Spend the rest (because i think i have enough savings)
Outcome: What's supposed to be RM12k in savings would have shrunk due to things like car repair, holidays, etc.

What i do now is estimate the total cost i need for literally everything for the year (car maintenance, quit rent, car insurance, holidays, birthdays, etc.) And put aside a fixed amount every month (total cost/12).

On top of this is what i put aside for actual savings. This means i have less to spend, but my savings are almost untouched at the end of the year.

Hope this helps.

 

[mlorrainee]

@matthewades Question. Does paying more than the set monthly installments for car loan actually do anything? I remember car/vehicle loan interest (as in amount and not %) is already fixed right?

For eg 5 year car loan for a 10k car with an interest of 3.2% is calculated as following:

(10000 + (100003.2%5))/60 = 193.33 monthly

Formula: (car price + (interest per annum * loan period in year)) / loan period in month

So even if you pay extra, you wont be gaining anything unlike mortgage loan

Do correct me if I'm wrong.

If this is the case then OP you dont have to clear all the debt in one go but just focus on the set monthly payments. The money all masuk ASB minus your SO's rewards.

 

[lunamu]

@mlorrainee Correct. Taking from your example, a car loan is a bank selling you 10,000 for the price of 11,600 (193.33x60).

If you've already paid 5000, and you want to terminate the loan, you'll have to pay not 5,000, but somewhere closer to 6,600 (in OP's case of 10% discount, 5,940). The bank will tell you depending on the term remaining.

The interest is already baked into the loan sale. You don't "save" the 3.2%.

 

[mlorrainee]

@lunamu Thanks!

 

[siphosethu]

@mlorrainee

Thanks!

You're welcome!

 

[matthewades]

@mlorrainee Hey man! Yup after much reading, most likely at the current point of my loan tenure. I had paid most of the interest incurred. But i was focusing too much on the 2k discount the bank is willing to provide if i cleared it off in one lump sum..
i will certainly pick and choose on which debt to clear first and keep the balance in asb.
Thanks man!

 

[mlorrainee]

@matthewades What is the remaining loan that need to pay? 2k discount is pretty tempting.

 

[lunamu]

@matthewades Option A. Liquid cash is king. Pamper your wife and save the rest. Big cash amount is hard to come by. 0% interest is also relatively hard to come by. Don't use 1 good thing to cancel the other good thing.

Your only debt with interest is the car at 3.2%. Thing is, you've already paid that interest when you signed the loan contract. You won't save much clearing it now. It's a waste of good cash.

Save it and invest in relatively liquid investments. You'll need the cash for your down payment, renovation, or the various charges you'll have to pay when you collect your keys.

 

[matthewades]

@lunamu Hey thanks for the advise! Your point no. 2 had completely slipped from my mind.. i was too focused on the 2k savings without thinking about the long term/bigger picture. Thanks!!

 

[pmmg]

@matthewades Hi OP, generally it is a good idea to clear off the highest interest debts. Some may even advice you to aim for higher return investment.

Since 6% return still offset your 4% interest. But as you said, the debts are you main stressors, so paying off the debts first may be more ‘rewarding’.

Not everyone can sleep with although the potential return is slightly higher.

I will choose peace of mind any time over potential higher return.

 

[johan_1988]

@matthewades Hi OP, I don't want to get into it too much, but the principle should be clearing off debt that incurs interest like car loan in your case and build up emergency savings (put it in FD or something). Also, try to reduce your monthly expenses.

 

[matthewades]

@johan_1988 Hey man! Thanks for the advise, appreciate it. Your last statement had been ringing through my mind through out the pandemic. And is something my wife and i are committed to do moving forward.