HomeFinance:  Understanding The Financial World Through Formulas

Standard Formulas Reveal Financial Complexities

Whether it's business or personal, making the most of your money means understanding how the world of finance works. Various lenders, banks, mortgage companies and other financial institutions use a variety of financial formulas to calculate interest, annuity and other common factors. Even credit card companies have their own formulas for compounding interest and even determining your creditworthiness when it comes time to accept or deny an application. There are almost as many formulas as there are ways to invest, save or spend money and most are fairly complex if not confusing.

Let's start learning about compound interest. Financial formulas can help you determine the future value of money you place into an account to accrue interest. If you place funds into an account that will increase it's value through compound interest, then you can use this formula to determine the future value of the money in the account:

  • FV stands for the Future Value of the funds in the account
  • P stands for the Present or Principal amount originally placed into the account
  • r stands for the interest rate per period
  • n stands for the number of period or years the money will remain in the account
This formula will help you to determine the future value of a compound interest account, loan or debt you may have.

Complex Financial Formulas May Require Help

One of the most important financial formulas, especially for retirement is the annuity formula. These calculations allow you to determine how much of an income you can draw off of a principal amount without depleting the funds. The calculation is a bit complicated but important for accurately determining the allowance you'll be able to receive from the invested amount. Since this calculation is so very complicated, it would be in your best interest to use one of the many calculators available online to determine both the present and future value of the funds in your annuity account.

Financial formulas can be complicated and without some knowledge of algebraic equations you may have trouble doing them on your own. Thankfully, there are may websites both financial and informational that have calculators and the most common financial formulas. Being able to see the results of interest and annuity calculations first hand can help you determine what is the best course of action for your investments. It will also help you gain a better outlook on your financial future.

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