Time Value of Money

The most useful “fun” utility on the zaFin suite was the time value of money calculator which basically allows you to compare the value of money at different times.
For example, how many times have you heard someone older than you mention the price of something way back when and then proceed to complain about the price of things today?
“When I was 25 years old, the price of bread was only 50c. Today, it’s R10!”
Well, 50c way back then was equivalent to just exactly how much today? Remember, all prices are relative, thanks to inflation. Things get more expensive, but we don’t still earn R150 per year (hopefully), right?
Nonetheless, the zaFin inflation and time value of money calculator will help put things in perspective for you.


ZaFin Genesis

ZaFin is the finally born with the first feature arrived: PAYE. (Hey. It’s a start and a natural one at that given it’s history). Now, ZaFin is a long-term project and has been a goal to get going for a long time now. Essentially, it’s the place to post tools which help you reach numbers you need to make informed decisions for yourselves. Given the state of the world economics at the moment, give me one good reason why would I want to get financial advice from “the system”? It’s track record speaks for itself. Neh. Have the courage to think for yourself, right?

So ZaFin is supposed to be that kind of place. A spot where you can, armed with a bunch of quick little nifty calculators, reach and juggle numbers to come up with a reasonable conclusion. You don’t need an advisor for that. I believe, armed with the right information (ie. numbers) most reasonable folk can come make up their own minds. And make pretty good decisions on their own too (and maybe also check in with an honest friend to bounce some ideas off).

There will be more to come, slowly, over time, as time allows; baby steps. Hope you find the first tool useful, and more importantly, simple to use and to the point giving all you need, and only what you need.


Refinancing Model

While explaining Morty, I left with a parting shot: Be careful about consolidating your debt. And before I continue, i will make the disclaimer that I’m not a financial advisor, just a curious number cruncher. So not entirely satisfied about not giving an example, I’ve now had the time to consider the model more carefully to present you with some numbers. So here goes…

Scenario: 2 loans exist, one for a house taken out in May 2004 for 800K at 14%, and one for a car in May 2006 for 160K at 16%. Come May 2009, you decide to consolidate your debt (for whatever reason).  Note, I will purposefully line up the dates and use nice round numbers to get the point across. Also, the interest rates used reasonably reflect the situation in South Africa at the time (as my memory serves).  But regardless of the actual numbers, the same maths (and hence lessons) apply. The math follows:

Home Loan:

  • 800K at 14% over 20 years = 9.9K repayment
  • You will end up paying 2.4M for the house over 20 years
  • That’s 1.6M in interest alone
  • After 5 years, you have paid off 600K, but have only 54K in equity

Car Loan:

  • 160K at 16% over 5 years = 3.8K repayment
  • You will end up paying 230K for the car over 5 years
  • That’s 73K in interest alone
  • After 3 years, you have paid off 140K, but only have 83K in equity

Now you want to consolidate your outstanding debt under one loan. And, we’ll assume you’re refinancing under more favourable interest rates- else why would you even reconsider it? So what you actually owe at this stage will be the sum of the settlement values on each loan, which will largely depend on the agreements you have in place. Let’s assume everyone plays nice and they let you off with the original loan less your current equity. It could be a lot worse! You now owe a total of approx 840K which you need to refinance, and because one of them is a house, you might end up reasonably re-mortgaging over 20 years again:

New Loan:

  • 840K at 11% over 20 years = 9.2K repayment
  • You will end up paying 2.2M for the combined loan over 20 years
  • That’s 1.4M in interest alone

So, where do you stand at this point?

You’ve definitely made a short-term saving in terms of your monthly repayments (10+4 vs 9). Your cash flow is a lot smoother! But with 2 seperate loans though, you would have paid a grand total of 2.6M (2.4M + 230k) over the lifetime of those loans. With a consolidated loan, you would have paid a grand total of 2.9M (2.2M for new loan plus payments already made on previous loans of 740K). Plus, your cash flow potentially deteriorates over the medium term. Once the car loan would have matured, you’re paying almost the same repayment (especially if by this time the interest rates have dropped) anyway. And then in the long term, you’ve got an extra 5 years of repayments to cover which is worth 0.5M of cash flow in the future.

All, in all, the simple summary of it that is you end up losing approximately 300K in the long run.

But it’s not all that bad- it can actually be to your advantage too. If the difference between the original financing rates and the new financing rates are large enough, you can actually save yourself a lot of money in the short, medium and long term too. But that requires approximately a 5% difference _at least_.

So think twice before you jump fall for the debt consolidation marketing trap. Make sure whoever is advising and structuring it for you that they go through all the numbers and look at it long-term. Obviously the refinancing will always benefit the lender which is expected and acknowledged, but just how much is fair and reasonable? We all have the right to make informed choices- and we should insist on that right- and just because it might sound technical or complicated or involve a lot of numbers, doesn’t mean it can’t be explained in a way that makes sense to you.

Hope that helps to at least think a little more deeply about the choices out there….

Business Technology


Morty is a pet project i been working on here and there which spills out an amortization schedule for you, based on your loan attributes. I’ve been incubating it at Heroku since it is quite a fascinating concept and tool. Their online console is pretty geeky but easy to use and deploying rails apps is straightforward really. Anyhow…. Morty.

Say you considering a loan for (in any currency) $150000 at an annual interest rate of 12%, compounded monthly over 5 years (or 60 compounding periods). Immediately you get an idea of how much your repayments are going to be.

In this case, 3336.67 per month. The schedule part is the interesting bit; if you are indeed interested. First, you can see, at a glance, how your equity in the loan grows and how quickly (slowly) the loan capital is repaid over time.

As you can see, it’s only just after halfway that you start to owe less than you’ve repaid. You will notice slight curves due to the nature of amortization. Experiment with bigger loans and interest rates to see just how the curve is affected.

You can also see how much total interest you end up paying, versus how much of the interest you’ve paid off so far.

Here, the curves are slightly more pronounced. Of the ±50k interest you’re going to pay back in total, most of it is paid off quite early. Which makes sense. The more you owe in the beginning, the more interest you pay. So if you really want to make a difference on the interest on your loan, over time, make the biggest impact you can as early on as possible. You can see that towards the end of the loan, how flat the curve is. If you start making advanced payments at this stage, you’ll still save, but not nearly as much as you could have if you were even one or two months earlier with that payment…

The schedule…

Numbers number numbers. All it is is numbers. The numbers tell you that when you make your first payment of R3336.67, almost half of that payment is paying back the interest. R1500, in this case. So, in effect, you’ve only paid back R1836.67 of the capital (R150k) back after actually paying R3336.67. That starting to make sense now? Sucks, eh? So you make another payment, through enforced religiosity (ie. debit order). This time, you’re _only_ paying back R1481 interest. The balance pays off the capital. And so it goes until eventually you reach a stage where you’re paying off more capital than interest with each payment.

Now take a look at your home loan. An average value in current property markets might be something like R800k at 14% over 20 years (or 240 compounding periods). You’re paying back almost R10k every month but your first 42 payments don’t even dent the capital by more than R1000 at a time. Effectively, after 3.5 years, you’ve paid over R420k back, but still have R767k out of the original R800k owing.

Eish. That’s why credit is so expensive and not everybody can afford to jump into the property game.

Which also brings me to another point… a parting shot, if you like. Think _very_ carefully about the impact of renegotiating your outstanding debt. Imagine: 3.5 years later, and almost half a million out of pocket, you get a generous offer an opportunity to renegotiate your existing debt. In essence, you start all over again. Remember the curve! Another 3.5 years later, another R400k out of pocket, and you’ve only managed to claw back R35k, give or take. Sound like a smart move?

**NOTE: Different institutions structure fees into their loans, so the actual repayments may vary if you ask them for quotes and compare to this calculator. Query the fees. Always.