Five calculations to manage your personal finance better
Many financial instruments like fixed deposits offer returns based on the compounded interest. The interest is offered on your principal amount as well as on the accumulated interest. So, if you stay invested for longer, the interest earned will be greater due to the power of compounding. The formula for interest compounded annually will be: Amount = P(1+r%/n)^nt – P where Principal = P, Rate = R% per annum, Time = n years.
While the calculation for your loan EMIs will be provided to you by your lending institution, you can easily double-check the numbers by using the formula EMI = (A*R)*(1+R) ^N/ ((1+R) ^N)-1) where A is the loan amount, R is the interest rate and N being the duration of the loan.
Post Tax Return
When you invest in certain financial instruments, the actual return differs from the rate of interest offered as the return is calculated after deducting the tax. This lowers the actual return. Tax on interest income is typically linked to the individual’s tax slab, while on capital gains, the tax norms vary from one asset class to another. The formula for calculation of post-tax return is interest rate – (interest rate*tax rate).
Compounded Annual Growth Rate (CAGR)
An understanding of Compounded Annual Growth Rate (CAGR) helps in calculating returns for investment instruments like mutual funds. CAGR is also used for comparison of two entirely different asset classes. It is calculated using the formula ((FV/PV)^(1/n)) – 1 where FV is the maturity value, PV is the investing value and n being the number of years for investment.
Future Purchasing Value Calculation
The value of the amount you will invest today will not hold the same value after a few years due to inflation. Taking the average rate of inflation in the last decade, Rs. 100 in 2007 is worth Rs. 206.50 in 2017. So, taking into account inflation while investing is paramount to understand your money value after a few years. Inflation computes the overall increase of price of goods and services taking into account both wholesale price index and consumer price index. To know the future equivalent value of any amount, you can use this formula: Present amount * (1+inflation rate) ^ number of years. So, for Rs. 5000 today at 5% inflation would be equal to 5000 * (1+5%) ^10 = Rs. 8144.