Essay 1: Financial Mathematics - Conclusions
Hopefully you have learned something about financial mathematics while reading through my first essay. Let us summarize some results without looking at the details of the mathematics again:
1. To invest $20 per month more, one gets $20090.31 more at the end of 30 years. The popular ignorant argument here is always that $20090 will not be worth much after 30 years. My first response is that it will be exactly $20090 more than if you did not invest the $20 per month extra. My second response is that $20 per month is a small amount and normally one can increase an investment by much more than a mere $20 per month. My third response is that if one can afford to increase an investment by $20 this year, by next year one should be able to (and should) increase this amount related to inflation. So for example, invest an extra $20 plus 5% of $20 per month in year 2 and so on.
2. Investing $600 per month for 2 less years will cost you $81532 after 30 years. Therefore, the sooner you start saving the better. The principle here is that there are three mathematical operations involved in financial mathematics namely addition, multiplication and raising to the power (exponents). Of these three, the exponent is by far the "strongest" and it is the one that involves the number of years you invest.
3. If you invest at an interest rate of 2% higher, you will have double the money at the end of 30 years. Now it is impossible to negotiate a 2% increase in your investment interest with the bank manager but the trick is to weigh up the interest on your investment to the interest on your debt. There you will see a much larger difference than only 2%. Conclusion - to invest money by paying off debt is a very wise decision. To invest extra money (like year-end bonuses or 13th checks) by paying it into your mortgage is a good decision.
4. An interest rate rise of 1% can throw your budget off completely (when you are in debt) or it can make you smile (when you are saving). Therefore make sure that you are saving and not spending borrowed money.
Link back to Essay l
Link to my 6680 Main Page
Link to my 6690 Main Page