Tag:

calculating

Mathematical Proof You Needed to Start Investing and Saving Yesterday

by Evan March 26, 2014

I was working with some calculations the other day and something became ridiculously apparent to me. You and I (along with almost anyone) literally can’t afford to wait to start investing and savings.

Calculating Contribution and Investing Returns

I think a very simple example will provide evidence that you need to start contributing, investing and saving yesterday.

Person A vs. Person B

Both are 22 years old
Person A decided to contribute $2,000 for the first 10 years of his or her working life to any type of investment vehicle you can think of. Person A inexplicably stops after the first 10 years. Not sure why they would but its just an example.
Person B thinks that he is unable to afford the contributions and says I’ll wait. He does wait but at the ripe age of 32 decides now is the time and invests that same $2,000/yr for the next 33 years.
They invest in the exact same stocks, bonds, mutual funds, etc and receive 6% after tax linear growth until retirement at 65.

So Person A put in $20,000 and Person B put in $66,000 – who will have more money?

Person A

Age	BOY Balance	Contribution	Growth	EOY Balance
22	$0	$2,000	$120	$2,120
23	$2,120	$2,000	$247	$4,367
24	$4,367	$2,000	$382	$6,749
25	$6,749	$2,000	$525	$9,274
26	$9,274	$2,000	$676	$11,951
27	$11,951	$2,000	$837	$14,788
28	$14,788	$2,000	$1,007	$17,795
29	$17,795	$2,000	$1,188	$20,983
30	$20,983	$2,000	$1,379	$24,362
31	$24,362	$2,000	$1,582	$27,943
32	$27,943	$2,000	$1,797	$31,740
33	$31,740	$0	$1,904	$33,644
34	$33,644	$0	$2,019	$35,663
35	$35,663	$0	$2,140	$37,803
36	$37,803	$0	$2,268	$40,071
37	$40,071	$0	$2,404	$42,475
38	$42,475	$0	$2,549	$45,024
39	$45,024	$0	$2,701	$47,725
40	$47,725	$0	$2,864	$50,589
41	$50,589	$0	$3,035	$53,624
42	$53,624	$0	$3,217	$56,841
43	$56,841	$0	$3,410	$60,252
44	$60,252	$0	$3,615	$63,867
45	$63,867	$0	$3,832	$67,699
46	$67,699	$0	$4,062	$71,761
47	$71,761	$0	$4,306	$76,066
48	$76,066	$0	$4,564	$80,630
49	$80,630	$0	$4,838	$85,468
50	$85,468	$0	$5,128	$90,596
51	$90,596	$0	$5,436	$96,032
52	$96,032	$0	$5,762	$101,794
53	$101,794	$0	$6,108	$107,902
54	$107,902	$0	$6,474	$114,376
55	$114,376	$0	$6,863	$121,238
56	$121,238	$0	$7,274	$128,513
57	$128,513	$0	$7,711	$136,223
58	$136,223	$0	$8,173	$144,397
59	$144,397	$0	$8,664	$153,061
60	$153,061	$0	$9,184	$162,244
61	$162,244	$0	$9,735	$171,979
62	$171,979	$0	$10,319	$182,298
63	$182,298	$0	$10,938	$193,236
64	$193,236	$0	$11,594	$204,830
65	$204,830	$0	$12,290	$217,120

Person B

Age	BOY BALANCE	Contribution	Growth	EOY Balance
22	$0	$0	$0	$0
23	$0	$0	$0	$0
24	$0	$0	$0	$0
25	$0	$0	$0	$0
26	$0	$0	$0	$0
27	$0	$0	$0	$0
28	$0	$0	$0	$0
29	$0	$0	$0	$0
30	$0	$0	$0	$0
31	$0	$0	$0	$0
32	$0	$0	$0	$0
33	$0	$2,000	$120	$2,120
34	$2,120	$2,000	$247	$4,367
35	$4,367	$2,000	$382	$6,749
36	$6,749	$2,000	$525	$9,274
37	$9,274	$2,000	$676	$11,951
38	$11,951	$2,000	$837	$14,788
39	$14,788	$2,000	$1,007	$17,795
40	$17,795	$2,000	$1,188	$20,983
41	$20,983	$2,000	$1,379	$24,362
42	$24,362	$2,000	$1,582	$27,943
43	$27,943	$2,000	$1,797	$31,740
44	$31,740	$2,000	$2,024	$35,764
45	$35,764	$2,000	$2,266	$40,030
46	$40,030	$2,000	$2,522	$44,552
47	$44,552	$2,000	$2,793	$49,345
48	$49,345	$2,000	$3,081	$54,426
49	$54,426	$2,000	$3,386	$59,811
50	$59,811	$2,000	$3,709	$65,520
51	$65,520	$2,000	$4,051	$71,571
52	$71,571	$2,000	$4,414	$77,985
53	$77,985	$2,000	$4,799	$84,785
54	$84,785	$2,000	$5,207	$91,992
55	$91,992	$2,000	$5,639	$99,631
56	$99,631	$2,000	$6,098	$107,729
57	$107,729	$2,000	$6,584	$116,313
58	$116,313	$2,000	$7,099	$125,412
59	$125,412	$2,000	$7,645	$135,056
60	$135,056	$2,000	$8,223	$145,280
61	$145,280	$2,000	$8,837	$156,116
62	$156,116	$2,000	$9,487	$167,603
63	$167,603	$2,000	$10,176	$179,780
64	$179,780	$2,000	$10,907	$192,686
65	$192,686	$2,000	$11,681	$206,368

Yup, Person A has a larger balance ($217k vs $206k). It is easy to get into the details, and fall victim of paralysis by analysis, but one of the basic points of personal finance is that regardless of the synonym you want to use (investing, contributing, savings, etc.) it should have started yesterday.

March 26, 2014 6 comments

Investments

After 5 and a Half Years I Sold My Home and I Don’t Think I Made Any Money

by Evan December 11, 2012

I sold my home yesterday. I don’t think the fact has really sunk in since I am not moving out until early next month, but it’s a pretty big deal! The home is not like other homes as it is part of a public housing program to keep young professionals on Long Island. The program worked as follows:

In a neighborhood of 130 55+ town homes 28 units were designated “Next Generation”
Those 28 units had over 300 applicants when the program was announced in late 2006.
There was a lottery. I was chosen as number 8
That allowed me the opportunity to purchase the home for $250,000 which was significantly under market value in 2007 (even at the sale price of $298,000 I would say it is still $100K or $125K under market value)
The sales price was connected to a formula that is tied to the town’s income not home values
Any New Purchaser must be a first time home buyer
The property must be used as a main residence (i.e. I can’t rent it).

So despite the worst housing correction in a generation I sold the property for a price $298,000 (maximum asking was $304K plus capital improvements). So I made a quick 20%, right? Not a chance and that is what I am curious about calculating.

Calculating if I Made Any Money on my Home Sale

As I deposited the checks today, I felt weird as I no longer owned the home that I really did/do love. I know we all look at the past in rose colored glasses but the the memories I have of this place bring a smile to my face. The Wife and I closed on the home about a year after I was out of law school and I was transitioning from my first job which I hated to the one that I still have now! I bought the house with The Wife before we were even married! It really does make me sad to think about leaving the place but I think that is because I am not particularly good with change.

The two things that may seem odd to others that I’ll miss are (1) Coming home for lunch to see The Wife and The Boy and (2) my neighbors. My neighbors freaking rule and when we were younger this meant black out nights with no driving but lately that means just a few beers when nothing is going on or a random BBQ on our shared driveway. Enough with the nostalgia! Lets do some math

How Much Interest Have I Paid on my Mortgage in 5 and a half Years

As most people know, a traditional mortgage is set up as a self completing amortization schedule where the amount you pay per month is the same but the percentage going to your interest versus your principal changes over the life of the note. Most of the interest is paid up front while major leaps in the principal occur at the end of the note. I threw my variables into a mortgage calculator:

40 Year Note (I was the only one on the mortgage and deed so I had a Debt to Income Ratio issue)
5.875% – good at the time but a terrible rate now
Was at the home for 66 months – June 13, 2007 to December 10, 2012

This leads us to $73,714 in interest payments alone. My Taxes have ranged but lets call it an average of $5k/yr for the 5 and a half years – another $27,250. Lastly, we have maintenance payments of $300 x 66 months $19,800. So ignoring upgrades (of which we did few) and repairs (of which we did very few) we have a total cost of about $121,000. That is a lot less than my gain, huh?

If we are going to get specific the taxes and interest payments were tax deductible. Assuming a 20% effective tax rate then we have about $20,000 in deductions bringing the number down $100,000.

Would I do It Again?

1,000%. I believe the calculations I did are what most people would encounter if anyone did the math on their main residence.

December 11, 2012 27 comments

Debt

Comparing Mortgage Rates a Generation Later

by Evan October 29, 2012

I don’t think many people actually understand how low the mortgage rates really are today and how those low rates work with an amortization payment schedule to make real property purchases an amazing opportunity. I recently had a conversation that reminded me that we are in uncharted territory historically speaking.

At every twist and turn in the house selling and purchasing process I have looked forward to getting my boss in his office to talk it out with him as I respect his opinion and at almost every opportunity he has provided insight that The Wife and I just didn’t think about. I don’t think he really understand how much I appreciate the advice he gives and one day I will let him know. It is almost to the point that if anything, at all occurs, The Wife and I will start to ask ourselves what would “Boss-man” think. It was during one of these conversations where we started crunching some numbers and were shocked on the outcome.

One day, Boss Man was telling me about buying his first home. It was in the late 80’s and he was purchasing a home with a $250,000 mortgage and he mentioned that his interest rate was around 10%. Side note: that same home on the same block is in the $600,000 range today, even after the correction, but he sold that home for $800,000+ a year before the correction. I had heard stories from Grandparents, my parents and my in laws about their first home purchase in the early 80s where mortgage rates were hovering near 20%! But since were on the topic I immediately fired up my mortgage calculator:

$250,000 Mortgage at 10% Interest:

$400,000 Mortgage at 3.75%:

His monthly payment was more than what mine is going to be and it was in 1990 dollars! Wow.

October 29, 2012 11 comments

Personal Finance

What Will My Mortgage Cost a Month?

by Evan March 18, 2011

Since the birth of our baby The Wife and I have been discussing future living arrangments lately. As often happens her parents (who live about 2.5 hours away) are visiting a lot more since there is someone there more important than The Wife and I (i.e. my cute child). But we only live in a 2 bedroom place so it has gotten a tad bit tight when they visit for up to 4 or 5 days at a time.

The Wife hates math. Hates it. So in one of our discussions she said, I just need the numbers. So the table below is for her, but everyone gets to share!

Monthly Mortgage Rate According to Size and Rate
	4.0%	4.5%	5%	5.5%	6%
$250,000	$1,193.54	$1,266.71	$1,342.05	$1,419.47	$1,498.88
$300,000	$1,432.25	$1,520.06	$1,610.46	$1,703.37	$1,798.65
$350,000	$1,670.95	$1,773.40	$1,878.88	$1,987.26	$2,098.43
$400,000	$1,909.66	$2,026.74	$2,147.29	$2,271.16	$2,398.20
$450,000	$2,148.37	$2,280.08	$2,415.70	$2,555.05	$2,697.98
$500,000	$2,387.08	$2,533.43	$2,684.11	$2,838.95	$2,997.75

The amount above is for the mortgage alone and does not include taxes or any other home expenses. So for example if I bought a $500,000 house and put $100,000 down (20%) then I would have a $400,000 mortgage which is likely to cost me somewhere between $1,900 and $2,400/month.

I am not exactly sure where our “sweet spot” will be. Our main objective is to keep The Wife working as little as possible without sacrificing her time with our Son. Living on Long Island being a one income family is near impossible in the areas we want to live, but we can be as close as possible as The Wife is in sales and can work as little or as much as she wants.

Our second objective is our lifestyle. We aren’t paycheck to paycheck right now nor do we want to be just for the sake and comfort of The Wife’s parents. Notwithstanding the size will eventually effect our sanity, but I think we’ll be gone before that happens.

* All calculations were done using DinkyTown’s Mortgage Calculator

March 18, 2011 23 comments

Debt

How Much Interest do I pay to Financing Companies and Banks? TOO MUCH!

by Evan November 4, 2009

This post was inspired by a post written by Patrick at Cash Money Life titled, “Do you Know How Much Interest You are Paying Each Month” and Matt Jabs at Debt Free Adventure titled, “How Much Interest am I Paying? Hint, its Less.” Interestingly Patrick uses just examples, and Matt uses his real numbers.

When I read both these posts I literally got sick to my stomach, and since they egged me on a bit, I decided to calculate it up! Since, I have no credit card debt figuring out the numbers was more difficult as compared to Matt. This is because that neither my Student Loan #1, nor my Auto Loan break down the payments for me.

So, to figure out approximately what I was paying, I headed over to one of my favorite sites, Dinky Town, and checked out their Amortizing Loan Calculator.

Debt	Monthly Payment	Principal Portion	Interest Portion	Percentage going to Interest
Mortgage Payment	$1,259 (without Taxes)	$139	$1120	~82%
Student Loan #1 (10 Year Law School Loan 5%)	$106	$73	$32	~31%
Student Loan #2 (30 Year Law School Loan 4%)	$252	$0	$252	100%
Auto Loan (72 Month 8.9%)	$291	$198	$92	~32%
Total	$1,908	$410	$1,498	~76%

Can you say what the hell? Each month an average of 76% of my payments to structured debt goes to interest! I knew when I first saw the inspirations for this post I’d be mad…and boy was I right.

Also, check out Student Loan #2! I remember when that number jumped from $180ish to $252 they told me I had signed up for a graduated increase when I was in school, but I didn’t know I wasn’t touching principal yet. You bet they will get a phone call later to figure out what is going on.

Lesson Learned from Calculating Interest Payments

I learned a very valuable lesson from this:

Regardless of whether I paid off my credit card debt, I have a long way to go until I am done being owned by a bank or finance company

I am going to have to get back on the wagon in terms of getting rid of debt! That being said I will have to recalculate which debt to start to attack first.

The Auto Loan has the highest interest rate at 8.9% but I am not sure how long I will have this loan for (i.e. sell the car)
Nothing is going to Principal on Student Loan #2 – even $20 bucks extra a month may save me hundreds over the course of this 30 year loan

DO THIS EXERCISE! If you need help I’d be happy to help

November 4, 2009 5 comments