Let's do the numbers

In my previous posting I mentioned that parents play a very important role in establishing sound financial management consciousness in their children. Let's face it, very few young people are interested in saving money or want to know how to deal with it and if a parent sets a bad example, a real nasty habit can develop in the child.

My motto is "Keep it simple". You don't need complicated structures and stuff to do the right thing. Let's look at two examples of just doing the basics right.

The MOST important lesson we all have to learn is that private/personal debt is never good.

Why? Because debt is an expensive luxury and if you watched the world economy go down the gutter over the last 12 months, you will understand that sitting on a box of dynamite for a very long time with nothing happening doesn't make it save.

Get rid of your debt:
If you have a bond on your house of R500 000. Let's say the interest you pay on the bond is 13%. If you repay your bond over 20 years the monthly repayment is R5 858. If you add all the monthly repayments for the 20 years your house will cost you R1 405 890.

Now if you increase your re-payment with R503 per month to R6 361, your house will be paid off in 14 years and 7 months and the house would cost you R1 125 950.

YOU SAVE R279 940 by just paying R500 pm more into your bond.

Now let's say you were smart and bought a small house/flat when you were 25 years old and only up scaled when you could buy a bigger place with the profit from selling the previous house without increasing your bond, and you used your annual salary increase to repay your bond as discussed.

At 40 you have a bond free house and can start saving/investing. Don't fall into the trap of accepting a great new line of credit from your bank! (believe me, they will come running. Why? because as long as you owe them money, you lose and they win!)

The sooner you can start investing/saving, the better.

• You start investing R500pm (R6000pj) at a return of 10% and increase the annual investment with the inflation rate (say 6%) every year. So in year 1 you invest R6 000, in year two you invest R6 360 etc. In 20 years you will have R580 860.
• If you start 5 years later, you will end up with R393 172

So by starting 5 years later, you invested R33 823 less because you started 5 years later, and lost R187 688 because of that.

Something we can discuss next time is whether you should get rid of debt before you start saving or 50/50 or what.

Sent me comments or questions any time.