When a penny saved is more than a penny earned

When a penny saved is more than a penny earned

The saying ‘a penny saved is a penny earned’ in one that most people know; its certainly something I heard repeated a lot as I was growing up. It’s not a particularly exciting concept though, not spending money.

It gets more exciting when a penny saved is a penny that’s earning (I know, it doesn’t have the same ring to it).

This isn’t intended as financial advice by the way, just information to help you make decisions with your money that will help you to reach your goals. I’m not responsible for decisions you do or don’t make after reading this article.

Putting extra pennies to your debt, be it mortgage, credit card or loan, reduces your balance and reduces your interest, and therefore helps you repay the balance sooner.

Take this example: If you have a mortgage at £100k and pay 3% interest over 25 years, your mortgage will be costing you in the region of £474 every month. For 25 years.

If you ‘save’ some pennies and put them to the mortgage, even as little as £26 per month to round up your monthly payment to £500, you’ll save £3513 in interest and pay your mortgage off 1 year and 11 months sooner (according to the overpayments calculator on moneysavingexpert.com).

£26 doesn’t seem like a huge sum of money to find in a monthly budget, but imagine how incredible it will be in 23 years and 1 month, when all of a sudden, you have that £500 sloshing around in your account EVERY MONTH! Now that’s a bit more exciting.

Now hold on to your hats. What about investing? It’s usually reasonable safe to assume that over a 25 year period, you can achieve a 4% average return by choosing low cost index trackers. (This is the first mention of investments on my blog, so if you’re new to the world of stocks and shares, please, please, make sure you get the low down on investing from a reliable source before jumping in).

So if you used that £26 per month to invest for 25 years (instead of paying it off your mortgage), you would have deposited £7,525 and earned returns of £5,304, leaving you with a nice £12,829 at the end of your mortgage, at which point you get an extra £474 freed up. (I’ve run these figures through an online compound interest calculator)

For investments, you’ll usually find that you need to invest more than £25 per month in funds; £50 is a more usual minimum amount, but the point of this was illustration. It certainly is worth considering.

So rather than being satisfied that a penny saved is a penny earned, aim to have your saved pennies earning more!

2 thoughts on “When a penny saved is more than a penny earned

  1. Why assume a 4% return rate if the US stock market has averaged closer to ten % since 1928? I understand the basis for a 4% withdrawal rate but not for a 4% investment return. Is that a UK thing I’m missing since I’m a US reader?

    1. Hi Steve, No it’s not a UK thing, I’m just uber cautious! I started investing only a couple of years ago when the stock market was already high and feel like continuing average of 10% is optimistic over the next 10 to 20 years. I tend to overestimate costs and underestimating income so I always end up with a surplus. I guess I hope for the best, plan for the worst! If investment returns continue to average 10% I’ll be laughing, but if they’re more conservative, I won’t have banked on a higher amount!

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