Sound money management is based on financial formulas. Knowing these mathematical relationships enables you to make wise decisions whether you're managing debt, assessing investments, or making retirement plans. Essential formulas are covered in this thorough guide along with useful examples and real-world applications.
Time Value of Money Formulas
The fundamental idea is that, because of its potential for growth, money available now is worth more than the same amount in the future.
Future Value of Lump Sum
EssentialExample Calculation
Future Value of Annuity
AdvancedLoan Calculation Formulas
Essential formulas for understanding and managing different types of loans.
EMI Calculation
Most PopularEquated Monthly Installments are calculated using a standard formula that is utilized by banks all over the world.
Home Loan Example
Effective Interest Rate
ImportantDetermines the true annual interest rate in cases where compounding takes place more than once a year.
Investment Return Formulas
Use these important metrics to evaluate and contrast the performance of your investments.
Return on Investment (ROI)
Compound Annual Growth Rate (CAGR)
Dividend Yield
Net Present Value (NPV)
BusinessUsed to evaluate a project's or investment's potential profitability. A positive net present value (NPV) signifies a profitable investment.
Savings & Compounding Formulas
Compound Interest
Most PopularInterest based on initial principal and accumulated interest is the "eighth wonder of the world."
Wealth Building Example
Rule of 72
A fast method for calculating the time it will take for an investment to double at a specific yearly rate.
Rule of 114
Calculates how long it would take for money to triple at a compound interest rate.
Rule of 144
Calculate quickly how long it will take for your money to grow four times.
Retirement Planning Formulas
Retirement Corpus Calculation
PlanningDetermines the required retirement corpus while taking expected returns and inflation into account.
Frequently Asked Questions
Perhaps the most significant is the compound interest formula, which illustrates the value of early savings and long-term investing. For loan management, it is also essential to comprehend how EMIs are calculated.
For interest rates ranging from 6% to 10%, the Rules of 72, 114, and 144 offer fast and reasonably accurate estimates. Always use the exact compound interest formula for accurate computations.
To ascertain the absolute value that an investment will generate, use net present value (NPV). To compare various investments and comprehend their percentage returns, use the Internal Rate of Return, or IRR. For projects that are mutually exclusive, NPV is typically preferred.
Utilize the formula for the real rate of return: (1 + nominal rate) ÷ (1 + inflation rate) - 1. After taking inflation into consideration, this shows you the real growth in purchasing power of your investments.
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