Kitchen Table Planning - The 'Secret' Formulas of Financial Planning

If you are like me math class was not the highlight of your day when you were in school. There are many formulas that melted from my brain like snow from a roof just as soon as I completed the test.

But there are some math formulas that were worth relearning. I use them every week. You might not need them but once a year. I don't expect that you will remember them five minutes after reading them, but knowing how they are used can help you reach your financial goals, so remember that.

The first formula is Future Value for Compound Interest. Just like the name implies it is a way to calculate the future value of something that is compounding. Here it is;

FV = PV * ( 1 + i )N

PV = present value
FV = future value
i = interest rate in percent per period
N = number of periods

Use it if you have a sum of money today and you need to know how much it will grow to at some future date. You don't even need a fancy calculator to use it. Just take the part ( 1 + i ) put it in a basic calculator as whatever the sum is times itself, then hit the enter key N number of times.

The next formula is the Annuity formula. It will tell you how much you can expect to have in the future is you invest some amount on a regular basis (monthly, annually, etc.) and earn some rate of compounded interest.

FV = PMT * [ ( ( 1 + i )N - 1 ) / i ]

FV = future value (maturity value)
PMT = payment per period
i = interest rate in percent per period
N = number of periods

If you contribute to an IRA every year you can use this formula to calculate what it could be worth when you retire. Don't let all the brackets scarer you, just do it a step at a time, working from the inside out.

The last formula is the Payment formula. You use it to calculate how large a payment you would need to make to pay off a loan or to accumulate a pile of money. With the internet it is easier to go to a site with loan payment calculators, but I'm a bit of a traditionalist.

PMT = P*i( 1 + i )N /( 1 + i )N -1

PMT = P*i/1-(1+i)-N

In future posts I'll explain how you can use these formulas to craft your kithen table financial plan.