The beauty of mathematics is that one does not need to have full knowledge of it to be able to apply some of the concepts constructively. It would help if everyone has an understanding of how basic math can help you with your finances. Savings are as universal as math, particularly for retirement. How much you save shouldn’t be determined capriciously. Good application of mathematics can help you determine how much you should save over a period.
The value of money generally diminishes over time. This means that the absolute income you earn now would not have the same real value ten years from now. If that’s the case, then you’re facing a career crisis. So, what is your income likely to be at retirement or in two years even? Leave the crystal ball for those who ride unicorns and get a basic calculator. Once you know your salary increase and your salary, you can figure out what your retirement or savings target is. Represent your salary increase as a common ratio. For example if your salary increase is 5% per annum, enter 1.05 on your calculator. If you’re trying to determine what your income would be in ten years, evaluate the common ratio to the power of 10. In the example we are using, the factor you’ll get is 1.6289. Then multiply 1.6289 by your current income and you’ll see what the absolute value of your salary is likely to be given an annual increase of 5%. The result, assuming a current annual salary of $100,000.00 would be $162,890.00. This information can help you assess the worth of the annuities that you have invested in, since you would be able to put projected values in a proper context.
One can also acquire a financial calculator to project future values given the time, interest rate and payment. The financial calculator would also afford you the flexibility of changing the subject of the formula. In goal-setting for savings, it’s an invaluable tool in precisely determining your goal and can also assist in evaluation the real value of a savings plan by using a discounting factor for purchasing power depreciation. Investors should also be aware of the difference between nominal and effective rates. The financial calculator can work these out easily.
Most savings and investment plans would be quoted with the annualised effective rate. An effective annualised interest rate of 9% means that the interest at the end of a year would amount to exactly 9% of the principal if the principal is left to be compounded. An effective monthly rate of 9% would mean that the effective annualised rate is actually 9.38%. The monthly interest rate for an annualised yield of 9% would be 8.64%. This difference arises because of the principle of compound interest. The difference may seem insignificant but it’s useful when calculating the monetary value of the interest that will be disbursed from your account, particularly with larger sums of money.
The benefit of doing these calculations for your savings plans is that you need not get all your sums correct to the nearest decimal point. A rough estimate would be alright since that’s only one part of the problem. Applying these basic principles of mathematics helps to eliminate guesswork from your finances.