WHILE extending the tenure of a loan means you will pay less per month, it will cost you more over the life of the loan through additional interest.

Though many people might take that extra income and just save it each month in a bank account, it’s important that one understands the time value of money

As defined by Investopedia, “The time value of money (TVM) is the concept that a sum of money is worth more now than the same sum will be at a future date due to its earnings potential in the interim. A sum of money in the hand has greater value than the same sum to be paid in the future.”

A classical example is the Jamaican beef patty and the declining purchasing power of money as the years progressed. In 2008 a beef patty cost $80. In 2022, a beef patty costs $220. There has been no significant change in the product’s composition, except for the cost of goods and labour needed to produce it.

Over that time, inflation came down from double digits of 16.8 per cent in 2008 to 6.2 per cent in 2019. Since the pandemic, inflation reached a seven year 9.7 per cent in January 2022. All this means is that the same money can purchase fewer goods.

In an article last week on mortgages, the Jamaica Observer’s Sunday Finance explored the cost of a mortgage for various age groups. This varied according to the age of the applicant, the amount of financing sought, and the time to repay the loan.

Today we’ll explore the difference between investing and saving, the difference one would pay if they took an extended tenure to pay off their mortgage. Let us assume the property costs $27.7 million, only 90 per cent financing is sought from a bank, the interest rate is 6.5 per cent, and both payments started in February 2022.

In scenario one, the monthly payment would be $157,574.56 if the person took a 30 year mortgage. They would end up paying a total of $56.73 million, which includes $31.80 million in interest payments. In scenario two, the monthly payment would be $150,615.67 for a 35 year mortgage. The total payment would be $63.26 million with $38.33 million in interest payments. This means the person in scenario two is paying $6,959.09 less per month in monthly payments, but pays $6.53 million more in total on the mortgage.

If the person takes that extra savings and puts it in a savings account each month at 0.4 per cent, they’d end up saving $2.92 million over the 35 years with only $215,605.97 earned in interest during that time frame. If one looks at the purchasing power of that accumulated interest after 35 years, one would discover that it would be negative and wouldn’t be able to make a significant impact in one’s life.

If that person took that same monthly amount and invested it in a stock or instrument which yielded eight per cent annualised interest, they’d end up with an additional $12.18 million which would result in an ending balance of $15.11 million. That is well beyond the extra amount someone would pay for taking a longer tenure loan. Lower monthly interest payments benefit the borrower when they earn above the interest rate when also accounting for inflation.

A Main Market stock on the Jamaica Stock Exchange (JSE) currently has the distinction of having the highest dividend yield and consistency in quarterly payments, even while the pandemic impacted the globe. When a dollar cost average (DCA) approach was done for this stock from 2010 to present, with the savings put into the stock each month, the dividends totalled $840,201.01 relative to the $1 million invested. The stock was also up by 37 per cent in capital appreciation of $370,432.92, which meant a total return of $1.21 million. The company just declared a $0.23 dividend which brings its trailing twelve-month dividend yield to 10.35 per cent. The DCA calculation was done through mymoneyja.com.

When one examines the growth of the JSE Index over the last decade, you’d see a 365 per cent growth in the index, while numerous stocks have done leaps and bounds beyond the overall index’s return. The Junior Market Index is just as interesting, with it being up by 802 per cent from 2010 to 2021. Of the 10 stocks that were originally listed, the lowest return for capital appreciation was 461 per cent, while the highest was 1,700 per cent, which doesn’t account for dividends paid. The S&P 500 Index in the United States of America has seen a steady increase over the last 30 years, with the largest company, Apple, returning 207,900 per cent in capital appreciation over that same time frame.

Even if a person doesn’t want to take on any general stock because of the perceived risk, there are preference shares being sold at an 18 per cent discount with two years to redemption and an interest rate of 5 per cent per annum. Investing in oneself and building your skills to provide more income is another strategy one can consider apart from solely acquiring income-generating assets from the get-go. All these examples are showing that, despite the fears associated with investing, it tends to work out over time when one accounts for the decline in real purchasing power of money held in a bank. There it nothing wrong with having an emergency fund, but speaking with a licensed financial advisor and understanding your goals is one thing you can do to improve your 2022 and combat rising inflation.