Sunday, June 24, 2012

What is $100 worth?

This may be one of the most important posts I will write to influence or change the way we think.  The concept is so simple but one that we don't often contemplate.  We have become so accustomed to being led by common thinking and financial "experts" that we often do not consider the math. 

Here is the question:  What is $100 worth?  The answer of course would seem to be $100 but when the subject of savings or investment comes up maximizing our spending habits we realize that the purchasing power can be radically different based on whose hands the $100 is in.  For one person it could be a night on the town and another food for 2 weeks.

When it comes to investing it is even more tricky.  Savings accounts currently pay almost no interest so are not beneficial except as a security and mental motivator for when just starting out keeping the money in a secret spot makes just as much sense.  For other investments few profits are guaranteed and even some with mutual funds took a beating during the ups and downs on Wall Street.

Another alternative is available that most of us skip over feeling we are using a teaspoon to move a mountain so give up before we start.  Today I will throw out the idea and may come back to it in the future.  Yes, at first glance it seems so boring that you might groan but before you do just take a look at the bottom line. 

Years ago when I did residential property management I was introduced to a website called I spent hours running numbers and developing scenarios using their mortgage calculator.  It is an invaluable tool that can save you thousands of dollars and will tell you what most lenders will not.  After all, they do make their money off interest payments.

This is very personal in that as I mentioned I now find myself with a mortgage payment in excess of the position I was once in and have contemplated much where to go from here especially in today's economy.  My goal is debt free and as the years to retirement lessen and the desire to do my own thing increases lately my musings have been almost daily.  Some of the things I had hoped to accomplish by this time was having the house paid off and placed in trust. 

What is $100 worth?

The chart below shows what the monthly payments on a $100,000 loan for 30 years at 6% interest would be.  We will use this as our baseline for comparison purposes only.  To customize this to your own unique situation go to the BANKRATE site and play with it.

Now, what if you could spare or reallocate $100 a month to an extra principle payment?  What would that look like?

The thing most important to notice here is the bottom line.  What is the new pay off date?  9 years have been cut from the payoff date.  So a little more math here:  9 years times 12 months = 108 months.  108 months x $599.55 which was the monthly base payment is a whopping $64,751.40.  Subtract from that our $100 per month that we have now paid for 252 months totaling $25,200 and our saving is $39,551.40.

So we can either say that our $100 a month payment is now worth $64,751.40 or we have made a profit of $39,551.40.  What better or more sure investment is available?  What better reason to make the adjustments needed to get it done.  Yes, it may require some juggling to accomplish it but 9 years less on a mortgage is certainly a noticeable improvement.

So what if after all the number crunching you (I) can't come up with $100?  How would $25 extra a month look? 

The payoff is 3 years earlier.  Again the math: 3 x 12= 36 months.  36 months times $599.55 = $21,583.80.  Subtract from that the 324 months the amount was  paid each month totalling $8,100 and the profit is $13,483.80.

The calculator also offers other options such as annual payments (tax return?) or one time payments.  The site itself has additional calculators that are easy to use and can help with many financial decisions as the computer has done the work for us.

Sometimes the simplest answers are in fact the right answers.  Just like compounded interest can work in the banks favor so can compounded payments work in the favor of the one with the loan.  Although I am not attempting to provide nor should this be construed as professional advice I hope that this tool will assist in your own decision making processes and lead you to seek the advice of your own tax accountant or whatever resource you choose.

 What is $100 worth?  A whole lot more than I thought.


Practical Parsimony said...

I know that your disclaimer is necessary, but this is exactly the advice a professional would give you. I would prefer that the instrument said "amount paid on principal." Everyone should write an extra check for the extra paid during any month and write in the notation "apply to principal." Otherwise, bankders can do as they please our of laziness, mistakes, or ignorance. If the amount is just added to the monthly mortgage payment, a person has not actually allocated it to the principle. Subtracting it from the principle is what adds up to savings in interest that makes early payoff possible and savings possible.

I kept 30 years of checks for my mortgage payments just for my own peace of mind.

Practical Parsimony said...


Carol Schultz said...

lol on your word correction. I so often do that myself. Love the English language!

You are absolutely right in that it should be noted that it is a Principle Payment. Many payment stubs have a line where this can be designated.