Category Understanding the Mathematics of Personal Finance

Spreadsheet Calculators

15.1 INTRODUCTION TO THE SPREADSHEETS

Two approaches to providing readers with computer-based calculators are employed in this book. One approach is to provide links to the many online calculators that provide slick interfaces and useful tutorials. A second approach is to create spread­sheets that, while not quite as elegant looking as the online calculators, allow the user to examine the calculations, modify and/or add features if desired, make avail­able some intermediate or extended results, generate reports, and so on. Also, by creating a set of custom spreadsheets tied to this book, I can provide a consistent interface among all of them.

An advantage of the online calculators for me is that I don’t have to create them; I just find them and then provide links at the appropriate place...

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RULE OF 78

This rule is sometimes called the sum-of-digits method. I’ll explain where both of these names came from shortly. As you shall see, any loan bearing this type of prepayment penalty is to be avoided. Various states have a legislation limiting its use. Hopefully, by the time you’re reading this, the practice will have been banned universally.

The rule of 78 payoff calculation used to be very popular with automobile loans. I understand it is uncommon today. As long as it remains legal, however, you’ll see it being used—principally among somewhat unscrupulous dealers who offer “sub­prime” loans to people who don’t have good credit, probably at an exorbitant interest rate.

I’ll use the auto loan of Table 5.1 as my first example. The spreadsheet Ch5PrepaymentPenalties...

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INSURANCE FOR THE REST OF YOUR LIFE

What if you want a life insurance not for a specific period such as 20 years but simply for the rest of your life? This type of policy would be different from that which I’ ve already presented. In the previous examples, the insurance company never knew if it would have to pay. The insured person could still be alive at the

Table 10.4 A 20-Year Decreasing Term $100,000 Life Insurance Policy

Age

q

l

d

Term PV ($)

Scale

Decreasing term PV ($)

50

0.003204

100,000

320

314.23

1.00

314.23

51

0.003432

99,680

342

322.59

0.95

306.46

52

0.003695

99,337

367

332.78

0.90

299.51

53

0.004000

98,970

396

345.14

0.85

293.37

54

0.004346

98,574

428

359.11

0.80

287.29

55

0.004725

98,146

464

373.76

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MINIMUM PAYMENT

Every credit card statement shows a minimum payment or a minimum amount due. This is the least amount of money that you can send in (before the due date) that will not trigger late payment fees or fines. Typically, this amount is sufficient to reduce your balance a bit—if you haven’t recently made more payments or received more cash advances.

The calculation of the minimum payment varies from credit card company to credit card company and can be slightly complicated. Usually there’s a lowest minimum payment (something like $15). If your balance due is less than this amount, then your minimum payment will be your balance due...

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CALCULATORS

The spreadsheet Ch13Stocks. xls will do correlation calculations and produces some numbers that I haven’t introduced yet. To use this spreadsheet, you must enter some stock prices. You can do this by typing them in (I’ll go through an example below) or if you’re proficient enough with spreadsheet operations, download them from the Web right into the spreadsheet. An important point is that you must enter stock prices that are uniformly distributed in date. The closing price every Friday afternoon for a year, for example, is a good data set. Entering daily information for the month of January and then end-of-month information for the rest of the year won’t yield any meaningful results...

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A NOTE ABOUT TOTAL INTEREST FOR A YEAR

When adding up the total interest paid or received for a year for income tax purposes, it is important to look at the details very carefully. For example, suppose you are paying a loan back monthly, with payments due on the first day of the month. If you regularly send your payments right on time, your lender will be crediting your payment, approximately, on the eighth day of the month. An end of the year summary statement mailed to you for tax purposes in 2010 will show the 12 payments made in 2009.

Now, suppose that, for whatever reason, you mailed your January 2010 payment on December 20 of 2009. It is possible that it reached your lender and got credited to your account in 2009. This means that your 2009 statement will correctly show 13 credited payments...

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