11 Personal Finance Equations You Need To Know
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<strong>What it is: </strong>Amortization means making periodic payments over time to pay off debt.</p>
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<strong>How to use it: </strong>This equation calculates how much the monthly payment will be on a debt. Rearrange the equation algebraically to show what portion of each monthly payment will go towards interest and toward the principle. </p>
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<strong>Best for:</strong> Calculating the cost of long-term debt like mortgages, car loans, student loans, etc.</p>
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<em>By<a href="http://www.businessinsider.com/author/jill-krasny"> Jill Krasny</a> and <a href="http://www.businessinsider.com/author/zachry-floro">Zachry Floro, Business Insider</a><a href="http://www.businessinsider.com" target="_blank"> </a></em></p>
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<strong>What it is:</strong> Simple interest is interest earned from principal. </p>
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<strong>How to use it: </strong>This calculation can be done quickly to provide an idea of how much interest will accrue over time. Just remember: This equation ignores the effects of compounding. You'll get an error when you're working with a larger principle and longer stretches of time. </p>
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<strong>Best for: </strong>Getting a rough estimate on what you'll earn in a savings account, or pay on a loan or a credit card.</p>
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<em>By<a href="http://www.businessinsider.com/author/jill-krasny"> Jill Krasny</a> and <a href="http://www.businessinsider.com/author/zachry-floro">Zachry Floro, Business Insider</a><a href="http://www.businessinsider.com" target="_blank"> </a></em></p>
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<strong>What it is:</strong> Compound interest is the interest earned on the principal, and on any interest accrued in the past.</p>
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<strong>How to use it:</strong> Use this formula instead of the simple interest equation to get a more precise number for how much interest will accrue.</p>
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<strong>Best for:</strong> Determining how much actual interest you will earn over time on an investment or pay on a debt.</p>
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<em>By<a href="http://www.businessinsider.com/author/jill-krasny"> Jill Krasny</a> and <a href="http://www.businessinsider.com/author/zachry-floro">Zachry Floro, Business Insider</a><a href="http://www.businessinsider.com" target="_blank"> </a></em></p>
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<strong>What it is:</strong> Cash flow shows how much you earn in relation to how much you spend.</p>
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<strong>How to use it:</strong> See whether or not you're living within your means. If the number is negative, you're spending too much; if it's positive, <a href="http://www.businessinsider.com/the-best-and-worst-ways-to-stash-your-emergency-cash-2011-11#comments" target="_blank">put the leftover money in savings</a>.</p>
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<strong>Best for:</strong> Figuring out where to <a href="http://www.businessinsider.com/budgeting-slideshow-2012-1?" target="_blank">tighten your budget</a>.</p>
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<em>By<a href="http://www.businessinsider.com/author/jill-krasny"> Jill Krasny</a> and <a href="http://www.businessinsider.com/author/zachry-floro">Zachry Floro, Business Insider</a><a href="http://www.businessinsider.com" target="_blank"> </a></em></p>
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<strong>What it is:</strong> The present value of an annuity formula equates the value of a series of payments in the future to a lump sum today by using the time value of money (inflation) -- a dollar today is worth more than a dollar tomorrow.</p>
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<strong>How to use it:</strong> Receiving $100 today is more valuable than having $10 handed to you every year for the next 10 years, because you could invest the $100 today then earn interest on it over the decade.</p>
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<strong>Best for:</strong> Deciding whether to take a pension or <a href="http://www.businessinsider.com/mega-millions-annuity-versus-lump-sum-2012-3#comments" target="_blank">lottery prize as an annuity</a> or a lump sum.</p>
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<em>By<a href="http://www.businessinsider.com/author/jill-krasny"> Jill Krasny</a> and <a href="http://www.businessinsider.com/author/zachry-floro">Zachry Floro, Business Insider</a><a href="http://www.businessinsider.com" target="_blank"> </a></em></p>
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<strong>What it is:</strong> The time value of money is also an important concept for the future value of an annuity, or the worth of your payments down the line. </p>
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<strong>How to use it:</strong> This equation answers the question: Should you take $10 payments each year for 10 years, or a lump sum of $120 in 10 years?</p>
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<strong>Best for:</strong> Seeing what it costs to pay someone with regular payments over time or upfront. Examples: child support, insurance, etc.</p>
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<em>By<a href="http://www.businessinsider.com/author/jill-krasny"> Jill Krasny</a> and <a href="http://www.businessinsider.com/author/zachry-floro">Zachry Floro, Business Insider</a><a href="http://www.businessinsider.com" target="_blank"> </a></em></p>
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<strong>What it is:</strong> As the economy moves up and down, so do investors' returns. To determine your yearly growth rate over several years on an investment, use the compound annual growth rate -- CAGR.</p>
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<strong>How to use it:</strong> Think of CAGR as the rate at which an investment would grow if the rate were constant. Investopedia has a <a href="http://www.investopedia.com/terms/c/cagr.asp#axzz21Tjr1khJ" target="_blank">good numerical example</a> of this concept. </p>
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<strong>Best</strong> <strong>for:</strong> Determining the average rate of growth on a stock, bond, portfolio, real estate, or any type of investment over multiple years.</p>
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<em>By<a href="http://www.businessinsider.com/author/jill-krasny"> Jill Krasny</a> and <a href="http://www.businessinsider.com/author/zachry-floro">Zachry Floro, Business Insider</a><a href="http://www.businessinsider.com" target="_blank"> </a></em></p>
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<strong>What it is:</strong> The leverage ratio compares debt to income. Total debts and liabilities are debts like student loans, mortgages, auto loans, and even the $5 you owe a friend.</p>
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<strong>How to use it:</strong> Aim for the lowest leverage ratio you can. Anything less than 1 is excellent, since you could pay off every debt with your income in one period.</p>
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<strong>Best for:</strong> Measuring your liquidity and determining whether you can afford to take out a loan.</p>
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<em>By<a href="http://www.businessinsider.com/author/jill-krasny"> Jill Krasny</a> and <a href="http://www.businessinsider.com/author/zachry-floro">Zachry Floro, Business Insider</a><a href="http://www.businessinsider.com" target="_blank"> </a></em></p>
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<strong>What it is:</strong> The rule of 72 is a quick approximation of how long it will take to double an investment.</p>
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<strong>How to use it:</strong> Take the rate of return on the investment and divide 72 by it to determine how many years it will take to double your money. </p>
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<strong>Best for:</strong> Choosing among multiple stocks, bonds, or savings accounts.</p>
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<em>By<a href="http://www.businessinsider.com/author/jill-krasny"> Jill Krasny</a> and <a href="http://www.businessinsider.com/author/zachry-floro">Zachry Floro, Business Insider</a></em><a href="http://www.businessinsider.com" target="_blank"> </a></p>
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<strong>What it is:</strong> The expected return of a portfolio shows what overall rate of return we're likely to get on all our investments.</p>
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<strong>How to use it:</strong> Everyone wants great returns, but people have different tolerances for risk. This equation can help determine the perfect mix of risky and safe investments for you.</p>
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<strong>Best for:</strong> Seeing if your portfolio has <a href="http://www.businessinsider.com/vanguard-founder-to-cuban-diversification-still-matters-2011-9?action=share" target="_blank">the right combination</a> of stocks, bonds, CD's, etc.</p>
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<em>By<a href="http://www.businessinsider.com/author/jill-krasny"> Jill Krasny</a> and <a href="http://www.businessinsider.com/author/zachry-floro">Zachry Floro, Business Insider</a><a href="http://www.businessinsider.com" target="_blank"> </a></em></p>
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<strong>What it is:</strong> The ultimate equation for figuring out how long you'll be paying off the balance on your credit card. </p>
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<strong>How to use it:</strong> Though it's the most complex equation on this list, it's still easy to do with a calculator. Use it to see whether or not <a href="http://www.businessinsider.com/dann-bergs-21000-credit-debt-success-story-2012-6" target="_blank">you should pay more on your bill</a> each month.</p>
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<em>By<a href="http://www.businessinsider.com/author/jill-krasny"> Jill Krasny</a> and <a href="http://www.businessinsider.com/author/zachry-floro">Zachry Floro, Business Insider</a><a href="http://www.businessinsider.com" target="_blank"> </a></em></p>
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<a href="http://www.businessinsider.com/author/zachry-floro">Business Insider</a></h3>
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