Wednesday, January 16, 2008

Being Smart with Financial Numbers

In the world of finance and business, rarely does two plus two equal four. Financial education is a must to learn the terminology and the nuances of financial markets.

No smarter than the rest

Even the experts get stumped occasionally although it may be more routine for us mere mortals.

"The titans of home loans announced they had perfected software that could spit out interest rates and fee structures for even the least reliable of borrowers. The algorithms, they claimed, couldn't fail."
Businessweek Sept 2007

So how do you avoid adding the wrong numbers or making the wrong financial assumptions?

Calculating Interest
Simple interest is easy and is what we use most of the time. But in finance and long term investing what works (or does not work) is compound interest. Compound interest can grow your savings exponentially or keep you mired in credit card debt indefinitely.

Credit: WSJ
"In a recent study, marketing professors Eric Eisenstein and Stephen Hoch found that most folks underestimated how much savings would grow and how much debt would end up costing.

The problem: People think in terms of simple interest, not compound interest. For instance, if our investments clock 8% a year for 10 years, we don't earn 80%, as many people assume.

Rather, we would notch a cumulative 116%."
If You Don't Know Your Math,You'll End Up Taking a Bath

But I Should Have More Money
$2 on the cup of joe, the lunch with friends, a new book, a little here and a little there - before you know it you are back at the ATM. Either it's a question of where does my money go or maybe I have no idea how much I have in the bank so why stop now. Now there is a remedy for the 'budget challenged'. Online services that track your spending, categorize your expenses and like it or not, tell you where you are spending your moolah.

"There are about two dozen such tools, said Jim Bruene, editor of Online Banking Report, an industry newsletter. Two recent additions are and, which both started last year. The newest offering is Quicken Online, out last week, which lets users log on from any computer or iPhone to see their current financial picture and sends text to most cellphones or email alerts when a payment is due."
WSJ - Online Tools Aid Money Juggling

Watch the fine print

Don't Make Financial Assumptions
Numbers change over time and you have to keep on top these changes. Credit card rates change, property tax assessments change, mortgage rates change (remember the ARM) and the deductions on your paycheck change. Bottomline - don't assume that what worked last year is working as effectively today. At least annually review your credit report, paycheck deductions, 401(K) allocation, your investment allocation/return, insurance coverage and debt obligations.

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