"11 Personal Finance Equations You Need To Know" by @daily_finance
What it is: Amortization means making periodic payments over time to pay off debt.
How to use it: This equation calculates how much the monthly payment will be on a debt. Rearrange the equation algebraically to show what portion of each monthly payment will go towards interest and toward the principle.
Best for: Calculating the cost of long-term debt like mortgages, car loans, student loans, etc.
2. Simple Interest
What it is: Simple interest is interest earned from principal.
How to use it: This calculation can be done quickly to provide an idea of how much interest will accrue over time. Just remember: This equation ignores the effects of compounding. You'll get an error when you're working with a larger principle and longer stretches of time.
Best for: Getting a rough estimate on what you'll earn in a savings account, or pay on a loan or a credit card.
3. Compound Interest
What it is: Compound interest is the interest earned on the principal, and on any interest accrued in the past.
How to use it: Use this formula instead of the simple interest equation to get a more precise number for how much interest will accrue.
Best for: Determining how much actual interest you will earn over time on an investment or pay on a debt.
4. Cash Flow
What it is: Cash flow shows how much you earn in relation to how much you spend.
How to use it: See whether or not you're living within your means. If the number is negative, you're spending too much; if it's positive, put the leftover money in savings.
Best for: Figuring out where to tighten your budget.
5. Present Value of an Ordinary Annuity
What it is: The present value of an annuity formula equates the value of a series of payments in the future to a lump sum today by using the time value of money (inflation) -- a dollar today is worth more than a dollar tomorrow.
How to use it: Receiving $100 today is more valuable than having $10 handed to you every year for the next 10 years, because you could invest the $100 today then earn interest on it over the decade.
Best for: Deciding whether to take a pension or lottery prize as an annuity or a lump sum.
6. Future Value of an Ordinary Annuity
What it is: The time value of money is also an important concept for the future value of an annuity, or the worth of your payments down the line.
How to use it: This equation answers the question: Should you take $10 payments each year for 10 years, or a lump sum of $120 in 10 years?
Best for: Seeing what it costs to pay someone with regular payments over time or upfront. Examples: child support, insurance, etc.
7. Compound Annual Growth Rate
What it is: As the economy moves up and down, so do investors' returns. To determine your yearly growth rate over several years on an investment, use the compound annual growth rate -- CAGR.
How to use it: Think of CAGR as the rate at which an investment would grow if the rate were constant. Investopedia has a good numerical example of this concept.
Best for: Determining the average rate of growth on a stock, bond, portfolio, real estate, or any type of investment over multiple years.
8. Leverage Ratio
What it is: The leverage ratio compares debt to income. Total debts and liabilities are debts like student loans, mortgages, auto loans, and even the $5 you owe a friend.
How to use it: Aim for the lowest leverage ratio you can. Anything less than 1 is excellent, since you could pay off every debt with your income in one period.
Best for: Measuring your liquidity and determining whether you can afford to take out a loan.
9. Rule Of 72
What it is: The rule of 72 is a quick approximation of how long it will take to double an investment.
How to use it: Take the rate of return on the investment and divide 72 by it to determine how many years it will take to double your money.
Best for: Choosing among multiple stocks, bonds, or savings accounts.
10. Expected Return of a Portfolio
What it is: The expected return of a portfolio shows what overall rate of return we're likely to get on all our investments.
How to use it: Everyone wants great returns, but people have different tolerances for risk. This equation can help determine the perfect mix of risky and safe investments for you.
Best for: Seeing if your portfolio has the right combination of stocks, bonds, CD's, etc.
11. Credit Card Equation
What it is: The ultimate equation for figuring out how long you'll be paying off the balance on your credit card.
How to use it: Though it's the most complex equation on this list, it's still easy to do with a calculator. Use it to see whether or not you should pay more on your bill each month.
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