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Nothing is Certain Except…
By Gary Case

Published in the Idaho Press Tribune March 2011

You 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 motor home.

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.

 


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