First, here a few variable definitions:
i = interest (daily, monthly, or yearly, depending on the period n)
n = number periods (days, months or years)
P = principal ( amount of money loaned)
M = monthly payment since most loans are paid monthly.
FV - future value
PV - present value (amount in savings)
FV = PV * (1 + i)^n
This formula is useful for calculating:
- How much one's savings will be worth n years in the future
- The impact of inflation after n years
|Value at n = 10 years|
M = P * i / (1- (1/(1+i)^n)
This formula is used to calculate:
- Monthly payments for a home mortgage.
- How much more one pays for something with an installment loan.
This formula is especially useful for determining how changes interest and time affects one monthly payments and total payment. Not surprisingly, a higher interest rate results in a higher monthly and total payment. However, while a shorter time (n) results in a higher monthly payment, the total payments are much lower. Also, the different between Total Payments and the principal (P) is the total amount of interest paid.
|Monthly Payment Equation|
Using these equations have been very helpful to me for deciding to save early, choosing a good mortgage deal, and avoiding debt.
For more on The Practice of Personal Finance , check back every Thursday for a new segment.
This is not financial advice. Please consult a professional advisor.
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