No, we don’t mean $100,000 is a small amount of money. Far from it! But more and more, we hear people talk about it as an insignificant amount when they are thinking about buying a new car or doing some lavish renovations. They’ll brush it off and say, “it’s only $100k! We can afford it.”
But this seems to be a relatively new thing. Five years ago, we never heard this. So how did such a large amount of money become nothing?
We thought we would show exactly how much value that $100k can actually have. It’s not about what the money is worth now – $100k is $100k – it’s about the opportunity cost. So it’s all about spending now versus how it could be spent in the future.
Let’s pretend you are ten years from retiring – what’s that sum worth to you now, and what could it be worth in the future?
For this exercise, imagine that $100k is in a totally separate super fund. If you were to leave it there over the last ten years of your working life without adding to it and assuming an 8% rate of return, it would grow by an extra $215,892. Thank you, compound interest.
In any case, whether you are taking out a loan or using your hard-earned savings for those renovations or that new car, you are still borrowing money from your future self. Listen to our podcast Every Time You Borrow Money, You Take it From Your Future Self.
On top of the growth on that original $100k, the sum will continue to compound once you retire. Assuming the 8% ROR, this would be $17,271 in the first year of retirement alone. If you imagine your super balance as the arc of a football being kicked, the highest point of the arc would be your first year of retirement.
From that additional amount, you could take out $20,000 each year to travel. Between the ages of 65 and 90, you could take out that amount each year – tax free – to a total of $517,000. So it’s not just $100k. And it goes to show that one decision at the age of 55 (the decision to spend or invest the $100k) can significantly impact your future.