Wednesday, September 12, 2018

Here’s how much money you can earn by paying R150 extra into your retirement each month

Many South Africans may feel that R150 is just too little to make a dent in their home loan or retirement savings each month, so end up spending their additional savings instead.
However, André Wentzel, solutions manager at Sanlam Personal Finance, points out that over the long-term, that amount can become a lucrative payout.
“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.”
“It really helps to be able to visualise short-term rewards versus long-term pay-backs to understand the effect of compound interest and how small sacrifices now can make a big difference later,” he said.
If you save an additional R150 per month towards retirement, this will accumulate to between R400,000 or R500,000 over a 30 year period, depending on what you assume the investment return to be. For example, an 8% return will yield R405,000 and a 9% return will yield R473,000, after investment costs.
This also assumes that you increase the R150 per month in line with inflation each year, Wentzel said.
Home loan
On a R700,000 home loan, assuming an interest rate of prime (10.25%), the monthly instalment for a 20-year loan will 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.
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% 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 make the longer-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,” he said.

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