The Element of Time

best advice for saving money

Time may seem like it’s infinite; but for all of us, it is a finite commodity. The reason I say time is a commodity is because it is an intangible product but just as valuable as something tangible of great value.  As Benjamin Franklin once quoted, “Time is money.”

We’ll explore why different aspects of your life related to this quote, and how learning to use both your time and money more wisely can lead you on a path to financial freedom.

Time Value of Money

Many of you, just like me, probably wished you had saved more money than you currently have in your savings account. The definition of Time Value of Money is the idea that money available at any present time is worth more than the same amount in the future given that it can earn interest. If you think back on it, you may realize you could have saved more over the years. The reason you didn’t is probably because a great deal of disposable income you had throughout your lifetime have been spent on things you really didn’t need, but just HAD to have. I’m certainly guilty of that. I’m not just talking about the designer clothes and shoes, but also small items you thought were negligible such as your daily dose of coffee, latte or your favorite drink. Such inexpensive items at any present moment can significantly reduce your nest egg once these expenditures continue over a long period of time.  

For example, most of us who are employed can easily save about $100 a month.  Not to mention you should have saved at least 10% of your paycheck anyways, before spending money on anything else.  If you think about it, $100 a month is about the price of a fancy cup of coffee per day. Now, how much do you think you would have, after 30 years if you had saved $100 at the beginning of every month for the last 30 years if the interest rate is 5% compounded monthly?  The answer would be $83,572.64.  As you can see, a small amount of money that seems negligible over the long haul, will amount to a large sum that can be difficult or impossible to replace to make up for lost time.  For those of you who are Millennials and haven’t been in the workforce for 30 years yet, start extracting and saving as much money as you can out of your paychecks so you can be the proud owner of a larger nest egg in the years to come.

For some, doubling your savings to $200 a month would probably not be a difficult task for which the reward at the end of 30 years would be about $250,717 given the same time value of money scenario previously shown. Find ways to cut your fixed monthly expenses such as cable or phone bills or any type of subscriptions which you may not have fully utilized. For those of you who dine out regularly, I am sure you can easily save $200 per month because it breaks down to only $50.00 per week.  With the high cost of living now, a half decent meal for one person can cost you $10.00 each meal, while drinking only free water. If you search hard enough, most likely you’ll find areas to cut back on. Inspire yourself to take on the challenge of looking for ways to save money on something every day, to have that extra $100 or $200 at the end of the month to contribute for the future. If you would like to make some of your own calculations based on your situation and savings goals, a financial calculator would be a great tool to have.  

Extra Payments on Your

Mortgage

In the previous Time Value of Money example, we used 30 years to calculate the amount of money we’ll end up with if we consistently save $100 per month. This time we’ll explore how much sooner you can pay off your 30-year mortgage and how much interest savings you can accumulate, just by paying an extra $100.00 per month towards your mortgage.  

Let’s take for example, a $300,000 loan amortized over 30 years at a fixed rate of 4.5%. If just an extra $100.00 per month was paid toward the mortgage from the origination date, the life of the loan would be shortened by 3 years 7 months, which means your 30-year mortgage would be paid off in 26 years and 5 months. In addition, you would save $34,085.83 in interest over the life of the loan. Again, it is the element of time that dramatically increases the overall savings stretched over a long period. Shortening the life of your mortgage by 3 years 7 months may not sound like anything to boast about, but it could mean the difference between retiring 3 years earlier or working for 3 more extra years.  Which one do you prefer?

If we now use an example with a higher mortgage amount, say $700,000 and an extra $400 paid monthly, beginning from origination, you would pay off the mortgage in 24 years 5 months which means you’ll save 5 years and 7 months. Keep in mind the higher the amount of the mortgage, the more you should contribute towards the principal each month. The lifetime savings in terms of interest in this case, would be $123,368.22.  As you can see, the rewards can be tremendous if you save your dollars now, to reap long term gains using the element of time.

If you would like to calculate how much sooner you can pay off your own mortgage based on how much extra you’d like to pay per month, please visit Dave Ramsey’s Mortgage Calculator at  https://www.daveramsey.com/blog/mortgage-calculator#/entry_form

Just type in the required fields including how much extra you plan to pay towards your principal on your mortgage every month, press the “show results” button to reveal what your early payoff savings will be.

The Sluggish Credit Card Debt

When it comes to paying off your credit cards, you don’t want to prolong, but instead shorten the time necessary to get your balance to zero.  Otherwise, consider what you purchased at a sale price, may now be something you overpaid for.

It’s probably just human nature, but most people will have a greater tendency to purchase something on credit card which you may not purchase if you only had cash.  At which time you may think twice about parting with your hard-earned money. It may take only a few minutes to swipe your credit card to purchase something you cannot afford, but then then making only the minimum monthly payment can be a sluggish and painful experience.

The Element of Time 2

Photo credit: frankieleon on Visualhunt/CC BY

 

Let’s say you have a credit card balance of $12,000 with an interest rate of 17.99%.  The monthly interest only payment would be $179.90. If you’re only comfortable paying $200.00 per month, it would take you about 154.40 months (12.87 years) to pay just the balance of $12,000 off without additional spending on the card. And the total interest you would have paid at the end of the 12.87 years is $18,880.85.  This is quite alarming because the interest alone that you paid is even more than the principal amount that was charged on the credit card which means whatever you purchased, you purchased for more than double the price.

Some consumers are not even aware of how much interest they are actually paying on their credit card, which can be a huge mistake. One should not underestimate the importance of paying attention and try to lower your rate as much as possible. A much lower percentage of interest you pay on your credit card can significantly shorten the time you spend to pay off the balance.  For example, just by taking the above scenario where the balance is still $12,000 and the monthly payment is still $200, but the interest rate is now 8.99%, then it would only take you about 79.92 months (about 6.66 years) to pay off the entire balance. The real difference is that the interest you would have paid at the end of the 6.66 years is about $3,995.41. That is a total interest savings of about $14,885.44 ($18.,880.85 – $3,995.41).

Below is a link from Vertex42 where you can find the credit card payoff calendar to calculate how fast you can pay-off your own credit cards.  

https://www.vertex42.com/Calculators/credit-card-payoff-calculator.html

Remember, if you’ve had the credit card you’ve been using for over two years and have been regularly using it and paying it on time, try calling the card company to see if you can lower your interest rate. Or, you can see if there is another credit card offer out there that can give you a zero % interest rate on purchases and balance transfers for a certain amount of time. You can then start making purchases on the new card and just pay down the balance on the old one as soon as possible. This way you can leverage the short period of interest free time on the new card.  However, don’t overspend because your goal is to pay off the entire balance by the time the interest free period expires.

In terms of balance transfer promotions, please be aware that even though the balance transfer interest rate is 0.0% for a certain time, there is usually a balance transfer fee associated with the balance transfer because it’s like doing a cash advance.  Depending on the financial institution, the fee can range, for example between about 3% – 5%. Some may be lower and some even higher. Let’s look at a couple of examples to see if it’s worth your time and money to transfer an existing balance from one institution to the next.  

Let’s take the previous example where if you have a credit card balance of $12,000 @ 8.99% interest rate and can only pay $200.00 per month, it will take you about 6.66 years (79.92 months) to pay off.  However, let’s say your promotional rate on your new card is zero percent for only 12 months, it would not be worth it to transfer the balance because the up-front balance transfer fee, if at 3.0%, would be $360, and the interest rate would start accruing after 12 months.

Another scenario where it is worth the effort to transfer an existing credit card balance is if the balance is $3,000 @ 17.99% and the monthly payments are $200.  It would take about 17.12 months (1.43 years) to pay off the balance at which time you would have paid about $423.71 towards interest. However, given the same scenario, you would not pay any interest at all, if the promotion is for zero percent for 15 months because at a monthly payment of $200, it will take 15 months to pay off the entire balance, saving you about $423.71 in interest. The 3.0% balance transfer fee on $3,000 would only come out to $90.00.  Savings of $333.71 ($423,71 – $90.00)

As you can see, the value of time and money work together in tandem either in your favor or against you depending on the financial choices you make. Take some time today to analyze your financial portfolio, starting with your savings, credit card debts and mortgage to see where you can cut back on debts and increase your savings for a better financial future for you and your family by leveraging the element of time.    

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