Quote:
Originally Posted by pattyskin
Comparing investing the $200 extra a month at an 8% return isn't really that important to most people as sadly too few of our citizens invest. I read somewhere that on average most people have more debt than assets these days. You should probably figure $200 a month less credit card debt for the average person. I don't feel like checking it but did you use the PvIfa? formula to figure out the 300k? 300k seems about right for that kind of annuity.
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I agree that most people ignore the opportunity to save, but they could make that choice. Drive a brand new BMW every 3 years (10 cars) or drive the equivalent brand new Infiniti every 3 years + save up $150,000 in the process.
If you look at the $200 per month as money used to pay off credit card debt rather than invest, then the long term impact is actually much greater than $300K since the effective interest rate is whatever you are saving in credit card interest by paying it off, assume at least 12% conservatively. In that case, that extra $200/month works out to around $700,000 in credit debt savings (assuming they don't just charge it back up). If their credit card debt is 20% (like some) that extra $200/month applied to credit debt works out to an astonishing (but true) $4.6 million in savings at the end of 30 years.
Since you asked, I am actually calculating the Future Value of the payment stream. Obviously, the PV is quite a bit less to be fair, but the Future Value illustrates "where you end up" by making the less expensive choice as opposed to what is the value of all of that difference today. Most people don't have the opportunity to capture the PV today (i.e. nobody is going to hand you the Present Value of all those future savings today because you bought a cheaper car), but they could get the FV tomorrow by choosing the cheaper car every 3 years when their lease is up...