Yesterday I wrote about how saving a few dollars here and there can add up to substantial savings.
If you haven’t read it, check out the article, the numbers in today’s article are based on a few dollars saved just by turning out lights, buying bread on sale, eating one less takeaway meal per month, walking a bit more, switching phone plans etc.
In other words, easy, doable savings.
What yesterday’s article didn’t take into account was compound interest. While saving a few dollars here and there can certainly add up to significant amounts, when you take into account either interest earned on your savings, or interest saved by using your savings to pay down debt, that’s when things get interesting (pardon the pun).
Here are a few examples of how to super charge your small savings.
1. High interest savings account
If you were to put your $121 monthly savings into an envelope under the mattress, at the end of five years you would have $7,260. That’s a nice little emergency fund.
Of course, few of us stash cash around the house, so what is the result of putting your money into a savings account with a modest 4.5% interest rate?
After five years you would have $8,124 in total and would have earned an extra $864 in interest. That’s an extra 7 months worth of savings.
2. Pay down personal debt
On the other hand, you could use the money you save to pay down personal debt. Here’s an example:
If you had a $10,000 credit card debt at 13% interest and with monthly repayments of $400, it would take you 15 years to pay off your credit card (assuming you stopped using it) and you would have paid $4,412 in interest over the 15 years.
With the extra $121 put towards repayments, you will pay your loan off in just 23 months and save $3,140 in interest.
That’s $2,276 more in your pocket than if you put your money into a savings account.
3. Pay down your mortgage
I want to write about this option in detail next week. In the meantime I will say what you already know: the more you put towards your mortgage, the more money you save on interest over the period of the loan. And as mortgage interest rates are higher than saving account rates and because extra repayments aren’t subject to tax, this option can really super charge your savings.
In fact, paying extra on your mortgage can quite literally save you tens of thousands of dollars in interest over the period of your mortgage.
4. Other options
Of course, you could spend your savings, there’s nothing wrong with that. It’s great to save money by not wasting electricity so that you can afford the things you really want (I’m dreaming of an SLR camera myself). Other options include:
- investing your savings in shares, investment funds, bonds, property etc.
- putting your savings towards your superannuation (if you’re my age, you could end up with over $100,000 extra at retirement by paying an additional $1,400 a year)
- donating your savings
- going on a Caribbean cruise
It’s up to you.
So if you ever wonder whether it’s worth the time and energy to save a few dollars here and there, know that those few dollars can add up to significant amounts, particularly with the power of compounding interest, whether it’s interest earned, or interest saved.
Do you bother saving the small amounts?