How to profitably invest free money: make a deposit or repay a loan?

We bring to your attention the wonderful material of our reader, which touches upon a very sad, and therefore very relevant topic of personal finance. Many of you have loans that you pay off regularly. But imagine that you received your 13th paycheck, a Christmas Bonus, or some other nice extra income. What to do with it? To spend? Put on a deposit or pay off part of the loan in excess of the plan? The answer to the question "which is more profitable" is given by the material below. It also contains an easy-to-understand loan calculator in Excel format.

I recently got some free money. And as always, when they arise, a pleasant problem arose - where to spend them? I immediately dismissed any useless purchases. I was wondering how they can still be used? Therefore, my choice settled on two possible options:

Contribution;
Or paying off some of my old loan. Oddly enough, you can also make money on this.

Which of these is more beneficial? And how much? At the same time, I was not interested in the moral side of the question: "how nice it is to have money on the deposit.." or "it is good to live without loans." And purely economic.

So what is given:

We have 10,000 free rubles in stock;
In August 2011, we decided to renovate the apartment and buy a ton of bananas. For this we took out a loan in the amount of 100,000 rubles;
The loan was taken in August 2011, so the loan has already been repaid within 15 months;
Monthly loan payment: 2 540 rubles, repayment method - annuity (Annuity - when the loan is repaid in equal installments. For example, 2 540 rubles per month. Convenient. But we overpay more than in other cases).
Loan term: 5 years;
Interest is calculated monthly on the amount of the remaining debt;
Alternatively, consider a deposit at 10% per annum with interest accrued once a year.

In both of these cases, something happens in our life. Let's try to understand what.

Now on to the fun part. Let's understand how much we will earn in both cases and for what it will be enough for us.

To do this, let's try to calculate the income from our investments in deposits and loans, the so-called ROI.

ROI is a measure of the return on investment. Expressed in%. It implies a comparison of the amount of income from an investment and the amount of investment itself. For example, I will put 10,000 rubles in the bank, and in a year I will get 11,000 rubles back. It turns out that I earned 1,000 rubles - this is my income. It is 10% of the initial investment. It is considered this way:

(Amount of income / Amount of initial investment) × 100% = (1,000 / 10,000) × 100% = 0.1 × 100% = 10%

This indicator is needed in order to compare different investments and investments. Where the ROI is more than 0 there is more profitable. For example, what is better to invest 5,400 rubles and get 500 or invest 7,800 and get 600? ROI will help answer this question. In the first case ROI = 9.3%, and in the second 7.7% (try to calculate it yourself). In the first version, more. It is more profitable. It turns out to be more profitable to invest these 7,800 in the place where they give 500 rubles for 5,400. In this case, we will get 722 rubles, instead of 600. Imagine, you would invest 100,000?

In the case of a deposit, everything is clear - how much money is earned, so much is income. That is, 10% of 10,000 = 1,000 rubles of income. Hence, ROI of contribution = 10%.

As for the loan, everything is somewhat more complicated. One simple thing to understand. Basically, the income from this type of investment will be the reduced amount of monthly payments. Because reducing costs leads to an increase in the amount of funds remaining with you. For example, you paid 10,000 on a loan and started paying 9,000. Is it profitable? Of course, even an extra 1,000 is nice. So, it is not the size of the payments that is important, but the fact that you reduce them. In business, a simple approach is taken: what is saved is earned. Apply it to you too. The less we pay, the more money we have left for our needs.

So, what do we have with the loan. After making the calculations (with the help of a bank employee or, which you can upload to work in Excel or Google Docs), we will establish that by investing 10,000 in our loan, we will reduce our monthly payments by 341.24 rubles. That is, we will receive an additional income of 341.24 rubles. It would seem a little. But in a year (12 months), 4,094.89 rubles will come up. That is, more than the deposit. Fine! We can spend this amount on the next New Year, or put them again on account of the loan repayment. By the way, what's the ROI? You can calculate it yourself. It will turn out for you equal to 40, 9% or 41% for an even account. Thus, it can be seen that, due to the decrease in payments, we get ROI of loan repayment = 41% per annum.

So what happens?

Bonus

Besides this, there is one more point that should be discussed. This is the amount of the overpayment on the loan. The calculation shows that as a result of reducing the debt on the loan, the amount of overpayment will decrease from 52 thousand to 49 thousand rubles - more precisely by 3,157.72 rubles. This amount is saved, which means that it is earned in the remaining 45 months (remember, we have been paying the loan for 15 months already).

Thus, monthly profitability = 3,157.72 rubles / 45 months = 70.16 rubles / month. For the year = 70, 16 rubles × 12 months = 841, 92 rubles. This can also be considered an additional plus of early repayment of the loan and indirect income from this investment = 8.4% (841.92 rubles / 10,000 rubles × 100%).

Total, the total profitability from early loan repayment= 4 094, 89 rubles (reduction of payments) + 841, 92 rubles (reduction of the amount of overpayment) = 4 936, 81 rubles = 49%. Now we will definitely have enough to start celebrating the New Year!

So how do we, mere mortals, choose an investment?

1. If you already have free funds, then decide if you want to get additional income?

2. Analyze what investment options are available to you.

3. Determine how you will receive income from these investments? In the case of a deposit, this is the interest on the deposit, in the case of a loan, the amount of a decrease in monthly payments and a decrease in the amount of overpayment on a loan.

4. Determine the amount of income. In the case of a bank deposit, this is the% on the deposit, in the case of a loan, a table or the calculations of a bank specialist will help you.

5. Calculate your annual income. While in rubles.

6. Calculate your return on investment (ROI). Divide the resulting annual income by the investment amount and multiply by 100%. You will receive a percentage of the return on investment. The percentage received from different investments can be compared with each other, determining the most profitable investment.

7. Voila! Congratulations! You are on your way to wealth!

Personally, I calculated (and this is the key word here) that it is much more profitable to invest my free 10,000 rubles in repaying a loan and get 49% per annum from this. I hope this article will help you to make the right decision in a difficult, but such a pleasant matter as investing. Manage your finances wisely. Turn on the brain:)

upd. By the way, we continued to study the topic of Personal finance, already in a new article about the depreciation of money. Welcome!

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