If you have R150 in your bank account once all your fixed monthly expenses have been paid, would you typically spend or save it?
"R150 can seem like such an inconsequential sum, that people would rather use it for a few cappuccinos or to treat themselves to a takeaway dinner. But doing this means missing out on the opportunity to turn a relatively small amount into a larger long-term investment," said André Wentzel, solutions manager at Sanlam Personal Finance.
Yes, an amount as little as R150 can, over the long term, make a dent in your home loan or retirement savings.
"It really helps to be able to visualise short-term rewards versus long-term paybacks to understand the effect of compound interest and how small sacrifices now can make a big difference later," Wentzel added.
To practically demonstrate this, he decided to do the maths. So here's what would happen if a person decided to invest the extra R150 in his or her future rather than on short-term gratification.
1. Towards your retirement.
If you save an additional R150 per month towards retirement, this will accumulate to between R400,000 or R500,000 in 30 years, depending on what you assume the investment return to be. For example, an eight percent return will yield R405,000 and a nine percent return will yield R473,000, after investment costs. This also assumes that you increase the R150 per month in line with inflation each year.
2. Towards your home loan
On a R700,000 home loan, assuming an interest rate of prime — 10.25 percent — the monthly instalment for a 20-year loan would be R6,608 per month. When contributing an extra R150 each month, the loan will be paid off in around 19 years instead of 20, and you'll save approximately R70,000 in interest over this period.
3. Paying off your credit debt
Paying off a credit debt of R15,000 over three years works out to a repayment of R525 per month at an interest rate of 18 percent per annum. An extra R150 per month means you can pay it off nine months earlier, saving approximately R1,100 in interest.
Wentzel said that practical exercises like this make long-term gains more concrete. "The trick to switching people's thinking from a short-term bias to a longer-term one is to better articulate long-term goals and find ways to make these seem attainable."
According to Wentzel, people with longer-term mind-sets typically have more retirement savings and are often better at managing credit. Additionally, being clear on their goals means that they're frequently more active in finding ways to save and avoid expense creep.