Numbers don’t come to me as naturally as words do and this partly explains why I jumped on the personal finance bandwagon a bit later into my twenties. Luckily, many of the basic and sound personal finance concepts can be powerfully communicated using various online calculators.
Here are a few examples using the calculators from the MoneySmart website.
Meeting a savings goal and the power of compound interest
If you are saving for a mortgage, it’s much less painful to slowly and steadily build up that deposit than to wait until you’re ready to purchase a house and realise that you need to scramble for it. The compound interest calculator is a great tool to work out how much you need to put away each month to meet your savings goal, allowing you to put in alternative scenarios so that you can compare courses of action and find the best strategy for you.
It also demonstrates how powerful it is to have time (and therefore compound interest) on your side. The purple bars below show somebody who has been putting away $500 per month for 6 years. During that time, the proportion of interest accruing on their savings is growing and they end up earning $5,161.00 of interest at the end of the 6 years. Alternatively, if this person only started saving 3 years before they were looking to buy a property and therefore doubled their savings to $1000 a month, they would have only earned $2,452.00 in interest. They end up with $2,709.00 less overall despite having saved the same amount.
The power of compound interest is even more impressive when you apply it to superannuation since there is such a long period of time for the interest to compound. If you start contributing 5% of your income to superannuation in your twenties, you end up with an additional $250,000.00 at retirement. In contrast, if you wait until you’re in your forties, you end up with an additional $105,000.00. Yes, young people have much more pressing things to be spending money on than superannuation, however are you really going to miss the 5%?
Why credit cards should always be paid off in full
This calculator demonstrates how you can get yourself into a really dire position with credit cards. The interest rates are incredibly high and a $2000 debt will take almost 19 years to pay off, incurring over $3,000 of interest, if you only make the minimum repayment. This calculator allows you to see how much interest you can save by increasing your repayments. My advice is to pay a credit card in full every month. If you can’t afford to pay the credit card off in full, you shouldn’t be spending the money in the first place. Aim to build up an emergency fund using your own money to provide a buffer when unexpected expenses arise.
The power of making additional mortgage repayments
We’ve had our mortgage for just over a year now, it started out with a negative balance of around $371,000.00 and I have recently decided to divert my savings into the mortgage as additional repayments. Alternatively I would have put the savings into my online savings account and earned 3.5% interest. Since my mortgage is 4.39% interest, the money is better spent avoiding the higher mortgage interest rate than earning a lower savings interest rate. As you can see from mortgage calculator results, if we continue paying our standard repayment of $1,977.00 per month, we will pay off the mortgage in 25 years and pay $240,000.00 in interest which is just a horrible thought. However, by contributing an extra $1,800.00 per month, we could pay off the mortgage in under 10 years and pay $85,000.00 in interest. This is a huge saving and seeing the savings laid out like this is a great motivation in keeping up with those additional repayments.
Why you should care about superannuation fees
This superannuation calculator is actually what prompted me to think about superannuation fees. Superannuation funds can charge investment fees and administration fees (both as a % of your overall superannuation fund and as a flat rate). The super fund I rolled into through my work charges a 0.64% management fee, a 0.40% investment fee and a $50 per year administration fee. This doesn’t seem like too much because the percentages are quite small. Also, I didn’t realise these fees even existed until I looked for them because they were buried deep in the Product Disclosure Statement. Even when I asked my firm’s financial advisor what the fees were, he only told me about the $50 administration fee. Well, it turns out that these fees will amount to $71,613.00 if I stay with this fund from now until I’m 60. Switching to a fund with a lower investment fee will save me $15,671.00. Of course, I also need to consider the returns made by each fund as well, however I now know that my current super fund’s fees are just way too high.
While you’re thinking about your finances, why not perform an unclaimed money search? I did this recently and found that the Victorian State Revenue Office was holding on to $21.00 for me so they sent me a cheque. It’s not much, but it’s better than nothing!