probably recognize the title as a phrase that
often ends in “death and taxes.” In
money maters, we might also include “interest”
in things that are nearly certain. Interest can
work for you or against you. Let me illustrate
with a story about a motor home.
Sam’s dream was to make great family memories.
He found a motor home he and his family could
enjoy and his bank approved a loan for $43,000
that Sam would repay over ten years at an interest
rate of 7.75%. On the day Sam signed the loan
papers, Mr. Interest became his partner in the
Sam’s loan payments were $520 monthly.
Adding storage, maintenance, fuel and insurance,
the monthly expense for the dream maker was ~$800.
Figuring interest and expenses over the 10 year
loan period, the total cost of the motor home
became nearly $97,000…still a fair price
to pay for the memories to be made.
Sam then thought
he would calculate what would happen if he chose
to save $800/month instead of investing in the
motor home. Assuming 7% annul return on his investment,
he would accumulate $138,467.85 by saving versus
spending over the 10-year period. Since Sam planned
to work for 30 more years, his account could continue
to grow, resulting in balance of $559,235.49 without
adding a penny more. If he continued to save $800/
month the total account value would become $975,976.82.
Sam began to understand that the true cost of
his $43,000 motor home is nearly one million dollars
in retirement savings!
This story is not about having you sell everything
you own and only save for the future. Money is
not the most important thing in life. There is
nothing wrong with owning a motor home or other
big ticket item. There is nothing wrong with using
credit judiciously. Mr. Interest can work for
you or against you. This example seeks to put
an actual dollar value on how interest can work
for you or against you, something that is important
to understand in real, not theoretical terms.
My next column will deal with the taxes Sam may
experience in his story. Stay tuned.