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- I know what you are thinking. That math’s most powerful equation is:
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------------------------------ E = mc^2
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- Well that equation simply tells you that mass and energy are the same thing. Mass is simply 90,000,000,000,000,000 times more concentrated energy.
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- The most powerful equation for your financial well being ,and general use in good decisions is:
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---------------------------- FV = PV ( 1 + i ) ^T
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- This is the equation for compound interest rates, or growth rates of any kind.
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--------------------------- FV = the Future Value of anything
-------------------------- PV = the Present Value of anything
-------------------------- i = the interest rate or growth rate, % / 100
-------------------------- T = the number of time periods for the interest rate.
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- The equation is easy to remember if you just remember what it does. Say you invest $100 and it grows at 4% per year for 5 years.
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------------- FV = 100 * ( 1.04) * (1.04)* (1.04) * (1.04) * (1.04) = 121.67
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------------- FV =- 100 * (1.04)^5
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- The compound interest rate done 5 times you made $21.67
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- And, you can easily see that the general formula is : FV = PV * (1+i)^T
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- Let’s say that when you start your career you put 10% of your salary, $4,000 into a mutual fund that grows 5% per year. How much can you get at your retirement is 40 years?
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------------------- FV = PV * (1+i)^T
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------------------ FV = 4,000 * (1+0.05)^40 = 4,000 * (7.04) = $28,000
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- You made $24,000 on you investment of $4,000. What would happen if you did that every year, investing only $4,000 per year. This amounts to a annuity with an stream of investments over 40 years. The equation for annuity, of amount A = $4,000 is:
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------------------- FV = A * [ (1+i)^T - 1] / i
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------------------- FV = $4000 * [ 1.05)^40 -1] / .05
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------------------ FV = $4000 * (6.04/.05) = 4000 * 141 = $563,199
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- Let’s use it on NASA Apollo program to get the average cost for a Moon Mission. The total investment was $26 billion. There were 7 missions so the average cost was $3.7 billion per mission.
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- But, what was the cost of the last mission? 1972 to 2007 = 35 years. The rate of inflation over that period average 4%.
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-------------------- FV = PV * (1+i)^T
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---------------------FV = 3.7* (1.04)^35 = 3.7 * (3.95) = $14.6 billion per mission.
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- No wonder NASA turned it over to private industry to pay for it.
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- Let’s say you hire a new employee at $10 an hour and 3 years later she is making $50,000 a year because she is trained and her customers are raving about her service.
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---------------- $10 * 40 hours * 52 weeks = $ 20,800
------------------FV = PV * (1+i)^T
--------------- 50,000 = 20,800 * (1+i)^3
--------------- 2.4 = (1+i)^3
---------------- (2.3)^ 1/3 = 1 +i
-------------- 1.34 = 1 +i
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- Your new employee is growing a 34% per year. How motivational is that?
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- Let’s start your military career out of college 1963 2nd lieutenant making $200 per month, with free room and board, if you count a cot as a room and the mess hall as board. After 6 years you are a captain making $900 per month. In 6 years you grew from $2,400 to $10,800 per year.
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-------------------- FV = PV * (1+i)^T
--------------------10,800 = 2400 (1+i)^6
------------------- 4.5 = (1+i)^6
-------------------- (4.5) 1/6 = 1+i
-------------------- 1.28 = 1+i
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- Your military career was growing at 28% per year.
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- Then you go into private industry for 35 years and make 120,000 by your retirement date of 2003. What was your value added to the company you were working for?
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---------------- FV = PV * (1+i)^T
--------------- 120,000 = 10,800 * (1+i)^35
-------------- 11.11 = (1+i)^35
-------------- (11.11)^1/35 = (1+i)
------------- 1.07 = (1+i)
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- Your career was growing at 7% and inflation was growing at 4% so your value to the company was 3% per year in contribution and service.
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- Your mortgage grew from $30,000 to $500,000 in those 35 years
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----------------- FV = PV * (1+i)^T
--------------- 500,000 = 30,000 * (1+i)^35
-------------- 16.67 = (1+i)^35
-------------- (16.67)^1/35 = (1+i)
------------- 2.23 = (1+i)
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- Your mortgage grew by 123 %. No wonder they called it a housing bubble. Your wife bought a new car for $60,000. Your first car in 1968 cost $3,000.
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----------------- FV = PV * (1+i)^T
--------------- 60,000 = 3,000* (1+i)^44
-------------- 20 = (1+i)^44
-------------- (20)^1/44 = (1+i)
------------- 1.07 = (1+i)
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- Car prices grew at 7% about the same as your salary growth.-
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-------------- See how powerful this simple equation is. Please teach your congressman how to use it.
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RSVP, please reply with a number to rate this review: #1- learned something new. #2 - Didn’t read it. #3- very interesting. #4- Send another review #___ from the index. #5- Keep em coming. #6- I forwarded copies to some friends. #7- Don‘t send me these anymore! #8- I am forwarding you some questions? Index is available with email and with requested reviews at http://jdetrick.blogspot.com/ Please send feedback, corrections, or recommended improvements to: jamesdetrick@comcast.net.
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707-536-3272, Thursday, November 29, 2012
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