Example 5: Monthly Installment Money Saving Opportunity
This example is slightly different from the Monthly Occurrence Example. A monthly occurrence is something that occurs every month and is never ending - utility bills, car insurance, cell phones, etc. A monthly installment eventually ends - a car payment, large furniture purchases, etc.
Let's look at potential monthly car payments. Your choices are a car that's a stretch for you financially - fully loaded. You know it's more than you should spend, but wow - everyone is going to FLIP when they see you driving this. With a deposit and trade-in, it's $525 a month for 5 years. On the other hand, your second choice is still a nice car. It doesn't have everything option one has, but it's still a desirable car. With the same deposit check and trade-in, the payments are only $385 a month for 5 years. So, if you get the hot car, you're only "losing" out on $140 a month for 5 years, right?
For Frequency, choose "Monthly Installment".
For More Expensive Choice, enter $525.
For Less Expensive Choice, enter $385.
This gives us a difference of $140.
Number of Installments is 60 (5 years x 12).
Now we'll choose our Investment Type.
We're still youngish, so we'll do stocks at 10%.
For Current Age, we'll make our example 28.
For Future Value Age, enter 55 for target retirement age.
Processing Years is set to 27 (55-28).
For the first 5 years of the 27, we'll invest $140 per month.
The remaining 22 years accumulates nothing but interest.
The financial calculator runs these figures through an Interest Formula and the result is shown in Future Value.
Do you have a guess at what the $140 per month for 5 years is worth when averaging 10% invested for 27 years? In pure principal, we're talking about $8,400. Wait until you see what happens when we add in our good friend, compound interest.
In this example, putting that money away for 5 years and then sitting on it for another 22 years at 10% yields $91,840. Oh Yeah. 91 Large! When you are at the dealer, you need to think about that $140 per month as $91K in the bank when you retire. Even if you change the investment to 8% and the term to 19 years, it's still $31,264. Now you can see how stacking those savings up over 3-4 cars can make a quarter of a million dollar difference in your nest egg.