10 financial calculations one should know for managing one’s finances

Personal Finance - Definition, Overview, Guide to Financial Planning

Not all of us were good at mathematics during our school days. In fact, some of us hated the subject and wish it ever existed. While some of us still may have similar feelings when it comes to calculations, there are a few calculations and formulae which all of us must know how to work with so that it helps us manage our finances in a better way. The reason is, if you do not want to pay heavy fees to financial advisors to manage your investments and finances, you need to be able to take control of your money.

You may argue that why know formulae when we have online calculators in today’s digital age? It is always good to know some basic formulae so that you do not have to always depend on an external source for computing certain calculations.

Let us take a look at 10 basic financial calculations that are deemed important for managing your own finances:

Compound interest

The formula for compound interest is

A = P * (1+r/t) ^ (nt)

Where –

A is the amount after time t

P is the principal amount or your initial investment sum

r is the annual interest rate (divide the number by 100)

t stands for the number of years

n is the number of times the interest is compounded per year

If you are a mutual fund SIP investor, then knowing this formula will help as one can know how much their investments will compound throughout their investment horizon and grow in the corpus.

Post-tax return

You may have reached out to your HR asking them why such a large portion of your gross income is deducted even after you submitted investment proof. And even if they gave you a valid reason, you did not understand. 

Use this formula to compute your post-tax returns –

Formula = Interest rate – (Interest rate*tax rate)

The interest rate will vary depending on the tax slab your gross income falls under. 

Infaltion

Inflation is your biggest enemy and you must take it into consideration while planning your long term investments. 

The formula for inflation is –

Future amount = Present amount * (1+inflation rate) ^number of years

Purchasing power

Since inflation reduces the power of purchase, it is essential to understand the purchasing power of rupees.

The formula is –

Effective Annual Rate = (1+(r/n))^n)-1*100

Rule of 72

If you want to know the time that you will take to double your money, you need to use the rule of 72. The formula is to divide 72 by interest rate. 

Compounded Annual Growth Rate (CAGR)

To understand the return on investment of a period you can use this formula.

The CAGR formula is –

CAGR=((FV/PV)^(1/n)) – 1

Where –

FV = the investment’s ending/maturity value

PV = the investment’s beginning/opening value

n = the duration in years

EMI for Loan

If you want to know the calculations that go behind the monthly EMIs, use this formula –

EMI= (A*R)*(1+R) ^N/ ((1+R) ^N)-1)

Where A is the Loan amount

R is the Interest rate

 N is the Duration

Future value of the SIP

Use this formula to determine the future value of your current mutual fund SIP (Systematic Investment Plan) –

S = R((1+i)^n-1/i) (1+i)

Where –

S = Future value of investment

R = Regular monthly investment

i = Interest rate assumed /12

n = Duration (number of months or number of years *12)

Liquidity ratio

To understand if your investment portfolio is able to absorb a liquidity crunch use this formula –

Total liquid assets\Total current debt

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