I love coffee! The very thought of drinking less makes me quiver with fear. But, sometimes one must take the emotion out of decisions and just look at cold, hard facts.
In a previous article on being more conscious with cash, I discussed how I buy 2 coffees each day, along with a breakfast and lunch. I’m not good at planning meals to bring to work but I have decided to spend slightly less. The savings I calculated was only R150 per week, but I’ve decided to look at how this could affect my home loan (mortgage bond) if I pay R600 extra per month.
These figures may not make sense to you if you use a different currency and your countries interest rates may be significantly different. I’ll post something soon about how you can do these calculations yourself.
The calculations can get messy so take note of the following assumptions:
Home Loan Value: R1,500,000
Interest Rate: 11% (annual)
Total Loan period: 20 years
For this example I will assume 2 years of the loan are already complete, and that up to now no additional payments have been made. Also, the R600 p.m. will remain constant (with other words I won’t save more in years to come)
This may all sound complicated, but the end result is simple to see. If I pay R600 p.m. extra into my bond until my bond is paid off I will:
- Save a total of R236,000 (rounded to nearest thousand)
- Pay the loan off 22 months earlier
That’s pretty amazing don’t you think? Considering that I am making this extra saving by cutting down on my weekly coffee/food expenses at my office. In fact, it was quite easy to find the extra R150 per week. Imagine if I actually analyze my expenses properly and relook at my insurance policies, health care, mobile phone contract, bank charges, etc. Imagine the savings I can make then!
What if you don’t have a home loan?
That’s really not a problem. If you invest this money in either a unit trust or interest bearing account for the next 15 – 20 years you will have quite a large lump sum. We’ll look at how to use the Future Value formula in Excel to calculate this.