What would you d if you had R150  left in your bank account once all your fixed monthly expenses have been paid? Would you typically spend or save this extra amount? If you are like many South Africans, you’ll feel that R150 is just too little to make a dent in your home loan or retirement savings so you’ll end up spending it instead.

André Wentzel, Solutions Manager at Sanlam Personal Finance, begs to differ. “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.”

Wentzel says, “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.”

To practically demonstrate this, Wentzel decided to do the maths. Here’s what would happen if a person decided to invest the extra R150 in his or her future rather than on instant gratification: 

via GIPHY

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’ time, depending on what you assume the investment return to be. For example, an 8% return will yield R405k and a 9% return will yield R473k, 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%), the monthly installment 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.

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% per annum). An extra R150 per month means you can pay it off nine months earlier, saving approximately R1 100 in interest. 

Now, here’s what R150 could get you in the short-term:

16 California rolls
6 cappuccinos
2 basic T-shirts
2 movie tickets
1 gigabyte of data
Wentzel says that practical exercises like this 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.”

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.

Personal Finance 

Categories: Money News