Understanding the Mathematics of Personal Finance: An Introduction to Financial Literacy

Understanding the Mathematics of Personal Finance: An Introduction to Financial Literacy

Lawrence N. Dworsky

Language: English

Pages: 264

ISBN: 0470497807

Format: PDF / Kindle (mobi) / ePub

A user-friendly presentation of the essential concepts and tools for calculating real costs and profits in personal finance

Understanding the Mathematics of Personal Finance explains how mathematics, a simple calculator, and basic computer spreadsheets can be used to break down and understand even the most complex loan structures. In an easy-to-follow style, the book clearly explains the workings of basic financial calculations, captures the concepts behind loans and interest in a step-by-step manner, and details how these steps can be implemented for practical purposes. Rather than simply providing investment and borrowing strategies, the author successfully equips readers with the skills needed to make accurate and effective decisions in all aspects of personal finance ventures, including mortgages, annuities, life insurance, and credit card debt.

The book begins with a primer on mathematics, covering the basics of arithmetic operations and notations, and proceeds to explore the concepts of interest, simple interest, and compound interest. Subsequent chapters illustrate the application of these concepts to common types of personal finance exchanges, including:

  • Loan amortization and savings

  • Mortgages, reverse mortgages, and viatical settlements

  • Prepayment penalties

  • Credit cards

The book provides readers with the tools needed to calculate real costs and profits using various financial instruments. Mathematically inclined readers will enjoy the inclusion of mathematical derivations, but these sections are visually distinct from the text and can be skipped without the loss of content or complete understanding of the material. In addition, references to online calculators and instructions for building the calculations involved in a spreadsheet are provided. Furthermore, a related Web site features additional problem sets, the spreadsheet calculators that are referenced and used throughout the book, and links to various other financial calculators.

Understanding the Mathematics of Personal Finance is an excellent book for finance courses at the undergraduate level. It is also an essential reference for individuals who are interested in learning how to make effective financial decisions in their everyday lives.

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spreadsheet, on either tab, the balloon payment at a given payment number is just the balance plus the monthly payment (remember that the balance entry is the outstanding loan balance after the monthly payment has been made). Looking at Table 4.3, for example, the loan payoff amount at payment number 72 is $163,160.39 + $1,526.20 = $164,686.59. 4.5 UP-FRONT COSTS You won’t see the term up-front costs in your mortgage contract. I’m using the term as a catchall for all the costs and fees

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but has some differences. On retirement, the worker is usually given the options of either receiving a full amount for his or her lifetime or receiving a reduced amount until the last to die of the couple passes away. In the former case, the retiree is receiving a conventional immediate fixed annuity based on his or her expected date of death and the pension fund accrued for this worker. In the latter case, the reduced amount is based on the employer taking the same 156 Chapter 11 Annuities

http://www.immediateannuities.com/; http://www.moneychimp.com/calculator/annuity_calculator.htm. VARIABLE ANNUITIES The variable annuity is a relative newcomer to the annuity stage. A variable annuity is an investment program tied together with the tax-deferred properties of an annuity. As when comparing investing to (savings bank) savings, the purchaser of a variable annuity is trading the opportunity of higher returns for a higher level of risk. The subject of variable annuities gets

its own maximum loan amount, and so on. There is a tremendous amount of information and a calculator with a detailed calculation breakdown at http://www.reversemortgage.org/. The examples shown in Table 12.1 were run on this calculator at the end of February 2009. I repeated these examples for homes in: Shoreline, WA—a suburb of Seattle; Scottsdale, AZ—a suburb of Phoenix; Barrington, IL—a suburb of Chicago; San Pedro, CA—a suburb of Los Angeles; and Middlesex, MA—a suburb of Boston and got the

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