In order you be financially stable and independent in the future, you will have to start managing your finances in advance. Controlling your finances while making the right decisions is an art which everyone can learn, but not many can master. There are several factors which can increase or decrease your profits and keeping a calculated record of everything can help in dealing with problems of inflation with ease. Get the best financial calculator to manage all your finances and keep a record. Here are some of the formulae you should know.
The financial experts have praised the power of compounding from time to time. Albert Einstein called it the greatest mathematical discovery of all time. Compounding is the process of earning interest on principal as well as accumulated interest. The potential for compound gain increases with the duration of the investment, which makes it a very powerful tool.
Formula: A = P*(1+r/t)^(nt)
A = amount after time t
P = principal amount (your initial investment)
r = annual interest rate (divide the number by 100)
t = number of years
n = number of times the interest is compounded per year
Post Tax Return
When we invest in a stock or a bank scheme, we lookout for the best return rates. But we forget that these returns will be much lower when we consider the taxes. Your fixed deposit is what you put in the bank, which is an absolute figure. According to the income tax rules, any income from a bank deposit is also taxable which means your taking out money from the fixed deposit will also charge you tax on the basis of the bracket in which you will fall.
Formula: Tax return = Interest rate – (Interest rate*tax rate)
If you fall under the bracket of 30% tax with an interest rate of 10%, then your post-tax return profit will be,
10 – (10*30%), which is 7%. Always calculate your post-tax return while investing in anything.
Inflation can affect the entire nation by degrading the value of the currency (Usually compared to the US dollar). Every time there is inflation, you will need to recalculate your saving plans. It is important to know what the future value of any currency will be.
Formula: Future amount = Present amount*(1+inflation rate)^number of years
Considering inflation as 5% for 10,000 dollars,
Future amount = 10,000*(1+5%)^10 = 16,289 (the future value after inflation)
Rule of 72
Rule of 72 calculates the time value of money. It will help you to determine the time you need to double your money at a given interest rate. It is also known as the ‘doubling of money’ principle. The thumb rule is to divide 72 by the interest rate. If the interest rate is 10 percent, the number of years it will take to double your money will be 72/10 = 7.2 years.