Want to know how to knock a whole year off your bond? For an R800,000 home loan, save an extra R150 per month for five years beforehand and pay in the proceeds with your first instalment.
Andre Wentzel, solutions manager at Sanlam Personal Finance, says that converting money to units of time can potentially influence your savings habit, and provides a series of practical examples.
The Financial Independence, Retire Early (FIRE) movement embodies the relationship between time and money. “The FIRE movement which is sweeping the States isn’t without criticism, but it’s a fascinating example of how aggressive saving can seriously pay off,” said Wentzel.
Made popular by the Mr Money Mustache blog, the idea is that the higher the percentage of your salary you save, the sooner you can retire. The proviso, said Wentzel, is frugal living.
Wikipedia explains that the aim of FIRE is to ‘accumulate assets until the resulting passive income provides enough money for living expenses in perpetuity’.
The goal is to have a minimum of 25 times your estimated annual living expenses. You achieve this by aggressively saving much more than the typical 10-15%. “The movement may be inaccessible to some people, but the savings principles it extolls can apply to all of us,” said Wentzel.
The example cited in Wikipedia is that ‘at a savings rate of 10%, it takes nine years of work to save for one year of retirement – assuming constant income and expenses and ignoring investment returns. At a 25% savings rate, you’ll be able to save for one retirement year in three years of work, at 50% it will take one year, and at 75% it will take you 4 months to save for one year of retirement’.
Wentzel said that every individual’s circumstances are unique so it’s difficult to apply a set formula to everyone, but the idea of equating money with time is a useful one for most people. “It’s part of a goal-based savings mindset, where the goal is to ‘buy time’ in our time-starved society,” he said.
“It’s a smart way to visualise a trade-off. Start thinking about how you can save money and buy yourself time to be present in your life. For example, you can put money away to buy yourself an earlier retirement or extra unpaid leave to spend quality time with loved ones. It’s also about the quality of the time you have. Saving now can reduce future financial stress, allowing for more meaningful moments.”
Here Wentzel gives practical examples:
Buy a year off your bond by saving an extra R150 per month
On an R800,000 loan at prime +1%, instalments are just over R8k per month (R8,028 for 20 years). Paying in an extra R150 per month knocks a year off the loan.
You can accomplish the same thing if you save R150 per month for five years before you get the bond and pay these proceeds in with your first instalment.
If you save R300 per month for 10 years before you get the bond and pay the proceeds in with the first instalment, you can knock five years off the bond.
Buy an early retirement
This depends on your age and individual circumstances, but a rough rule of thumb assuming you’re already on track to retire at 65 is:
- At age 30, save 1.2% more of your income per annum to retire one year earlier. Save 6% more of your income to retire five years earlier.
- At age 35, these become 1.5% and 8%.
- At age 40, these become 2% and 10%.
- At age 50, these become 3% and 15%.
Paying off a debt of R30,000 over three years, at an interest rate of 18%, would require R1,050 per month. If you saved this amount for two years before the big spending event and opted for an investment that earned 8%, it would take just over two years to accumulate the R30,000. “That means enjoying a trip every two years instead of every three years,” Sanlam said.