how to calculate an amount to be financed

How to Calculate an Amount to Be Financed.

The full price of a major purchase such as a house, boat or car is rarely financed. Most lenders for these types of loans require a down payment of some sort, usually expressed as a percentage. Additionally, mortgage loans list a different figure, "amount financed," which does not include prepaid fees paid to the lender. Knowing how to calculate an amount to be financed will help you make informed consumer decisions.



Part 1 Calculating a Commercial Loan Amount to be Financed.

1. Determine the selling price. For a vehicle, boat, or another type of commercial loan purchase this will be the amount you agree to pay for your new acquisition. It does not include other aspects of the deal such as the trade-in allowance, fees, taxes, and other closing costs.

2. Subtract any net trade-in allowance. For auto or boat purchases, among others, a dealer may offer a trade-in allowance or credit for giving them your old car or boat when you buy a new one. The value of this item, or a credit provided by the dealer, is then subtracted from what you owe on your new purchase. The net trade-in allowance is found by subtracting the amount still owed on your trade from the trade-in allowance offered by the dealership.

If the trade-in is high enough, dealers don't typically require an extra payment, such as a down payment.

Some dealers may allow you to use the trade-in value of your old vehicle to cover the required down payment on a new one (assuming the old one holds enough value).

3. Account for any cash rebates that are applied to the purchase price of the item. Dealers may also offer cash rebates as a way to incentivize purchases. These cash rebates are simply subtracted from the purchase price at closing. They also do not need to be included in the amount to be financed. Rebates may be provided to certain buyers, like students or military veterans, or may be specific to certain vehicles.

4. Settle on a loan amount. The amount left after rebates and trade-ins is the the amount owed. This amount must be either paid in full or borrowed from a lender and paid off in installments over time. From here, you can calculate the down payment if the lender requires one. For example, a lender might require 10 or 20 percent down on your purchase. Your loan amount is then the amount remaining after the down payment is subtracted out.

5. Use the loan amount as your amount financed. "Amount financed" is a term that is specific to home loans. All other loans simply refer to the amount financed as the total amount of the loan provided to the borrower. For these types of loans, simply use the loan amount after the down payment as calculated in this part as your amount financed.



Part 2 Determining the Amount Financed for a Mortgage Loan.

1. Negotiate a price for the asset with the seller. For a home, this will be your accepted offer price. For example, you might talk a homeowner down to selling a property for $100,000.

2. Subtract any deposits. Home purchases may have required a "good faith" deposit. Other purchases may also require a deposit be made while bidding on or reserving the item. This deposit is typically paid upon submission of an offer to purchase. This money is then subtracted from the purchase price, as you have already paid it.

Deposits are either returned (depending upon terms) or converted into the down payment amount and/or closing costs.

For example, if you put in a $3,000 good faith deposit on a $100,000 home, you would subtract this from the $100,000 to get $97,000.

3. Finalize the loan amount. The portion of the original purchase price remaining after these deductions is your loan amount, assuming you are planning on financing the purchase. This amount must be borrowed from a lender and then repaid over a period of time per a loan agreement. The loan amount is the amount borrowed from the lender, not the amount that will eventually be repaid in total, which also includes interest expenses.

4. Deduct the down payment amount. The down payment is paid in full upon closing the sale. It is generally a percentage of the total purchase price and is designed to provide security for the lender in the event of default. Therefore, it is not included in the amount financed.

Many mortgage lenders require 20 percent down on a real estate transaction, although you may be able to secure an FHA-backed mortgage requiring as little as 5 percent down payment. A lower loan balance results in less interest expense and the possible requirement of mortgage insurance.

A lower downpayment is expected on government- guaranteed loans such as FHA or VA because the lender has recourse to the Federal government in the event of default.

For example, if you paid a 20 percent down payment on the $100,000 house purchase, which would be $20,000, you would subtract this from your total.

Your good faith deposit may be applied towards your down payment. This means that the loan amount would still be the purchase price minus the down payment, which is $80,000 in this case.

5. Understand how amount financed differs from the loan amount. "Amount financed" is a term set by the 1968 Truth in Lending Act to describe how much credit is provided to a borrower when they take out a home loan. It is calculated by subtracting prepaid fees and finance charges from the loan amount, since these fees are paid at closing simultaneously with the execution of the loan documents. This means that the amount financed is always less than the actual loan amount. The amount financed is provided to borrowers on the Truth in Lending Disclosure Statement, which is supplied after you apply for a home loan.

6. Add up prepaid fees. Prepaid fees are subtracted from the loan amount to arrive at the amount financed. These fees include prepaid points, homeowners association fees, mortgage insurance, and escrow company fees. They also include lender fees like underwriting fees, tax service, process fees, and prepaid interest. Add all of these fees up to arrive a total prepaid fees amount.

7. Subtract total prepaid fees from the loan amount. Subtract all of the prepaid fees from the loan amount to get your amount financed. This information will also be available on your Truth in Lending Disclosure Statement.[9]



Part 3 Using the Amount Financed.

1. Compare different lenders. If you have the amount financed for a mortgage loan, you can use this information to compare different lenders by looking at the associated fees and interest rates. This information is provided on the Truth in Lending Disclosure Statement, which is provided by all lenders to loan applicants. If you instead are financing another purchase, you can use your amount of financing required to apply to a variety of loans and look for the best combination of fees and interest rate.

2. Calculate the amount of interest you will pay. Your loan will likely be charged compound interest as you pay it off. Compound interest paid increases with the loan duration, the interest rate, and the compounding frequency (how often the compound interest is calculated each year). When you have the amount financed, you can use online interest calculators to determine how much interest you will pay on loans with different loan terms. A longer, higher-interest loan will end up costing you much more money in the long run than a shorter-term, low-interest loan.

For more information, see how to calculate interest payments.

3. Calculate loan payments. If you know how much you need to borrower (your loan amount), you can use this information to check for loan rates online. Check loan aggregator sites to find interest rates for the type and size of loan that you need. Then, input this information into an online loan calculator to figure out what your monthly payments might be. The Financial Industry Regulatory Authority (FINRA) provides a good calculator at http://apps.finra.org/Calcs/1/Loan.

4. Assess your ability to afford a purchase. Once you have an idea of the monthly loan payments, you can use this information to figure out how much you can afford to take out in a loan. Assess your ability to afford the loan by starting with your monthly after-tax income. Then, subtract any existing debt payments (mortgage, auto, etc.), monthly expenses like utilities and food, and savings or contributions to an emergency fund. The amount left is money that you can afford to pay towards a new loan's monthly payment.

Most financial planners suggest limiting house payments plus taxes and insurance to 25 to 28 percent of take-home income.

For example, if your household net income is $7,000 per month, your total outlay for housing should be no more than $1,960 per month.

5. Determine mortgage APR. Your actual mortgage annual percentage rate (APR) is calculated using your amount financed, rather than the loan amount. That is, your actual APR will be higher than the interest rate listed on your loan. To calculate your actual APR, find your monthly payment by using your stated interest rate, loan term, and loan amount and entering them into a loan calculator. Then, record your monthly payment and find a loan calculator that allows you to input your monthly payment, loan duration, and loan amount and receive an interest rate as the output. The output will be your actual APR.

A good calculator for this purpose can be found at http://www.thecalculatorsite.com/finance/calculators/interest-rate-calculator.php.



Question : Gomez family has just purchased a $2,574.54 microcomputer. They made a down payment of $574.54. Through the store's installemnt plan, they have agreed to pay $121.00 per month for the next 18 months. What is the amount financed?

Answer : The amount financed is the portion of the purchase price paid for by the installment plan. In this case, it is the $2,574.54 (purchase price) - $574.54 (the down payment), which is $2,000. The amount to be financed does not include the interest paid during the plan, which will be $178.

Question : Selling Price: $258,900. Loan term: 30 months on 5.25% interest rate. Down payment: $64,7325. What will be the amount to be financed?

Answer : You will be financing the selling price plus any fees, minus the down payment.



Tips.

When shopping for real estate, be sure that your price range reflects your planned amount financed. You may be able to afford more or less, depending upon your savings and the amount of a down payment.

Warnings.

The purchase agreement used by many car dealerships is notoriously complicated and confusing. Be certain that you understand every line item in the agreement before signing it when buying a new or used vehicle.

February 10, 2020

How to Calculate an Amount to Be Financed

How to Calculate an Amount to Be Financed.

The full price of a major purchase such as a house, boat or car is rarely financed. Most lenders for these types of loans require a down payment of some sort, usually expressed as a percentage. Additionally, mortgage loans list a different figure, "amount financed," which does not include prepaid fees paid to the lender. Knowing how to calculate an amount to be financed will help you make informed consumer decisions.



Part 1 Calculating a Commercial Loan Amount to be Financed.

1. Determine the selling price. For a vehicle, boat, or another type of commercial loan purchase this will be the amount you agree to pay for your new acquisition. It does not include other aspects of the deal such as the trade-in allowance, fees, taxes, and other closing costs.

2. Subtract any net trade-in allowance. For auto or boat purchases, among others, a dealer may offer a trade-in allowance or credit for giving them your old car or boat when you buy a new one. The value of this item, or a credit provided by the dealer, is then subtracted from what you owe on your new purchase. The net trade-in allowance is found by subtracting the amount still owed on your trade from the trade-in allowance offered by the dealership.

If the trade-in is high enough, dealers don't typically require an extra payment, such as a down payment.

Some dealers may allow you to use the trade-in value of your old vehicle to cover the required down payment on a new one (assuming the old one holds enough value).

3. Account for any cash rebates that are applied to the purchase price of the item. Dealers may also offer cash rebates as a way to incentivize purchases. These cash rebates are simply subtracted from the purchase price at closing. They also do not need to be included in the amount to be financed. Rebates may be provided to certain buyers, like students or military veterans, or may be specific to certain vehicles.

4. Settle on a loan amount. The amount left after rebates and trade-ins is the the amount owed. This amount must be either paid in full or borrowed from a lender and paid off in installments over time. From here, you can calculate the down payment if the lender requires one. For example, a lender might require 10 or 20 percent down on your purchase. Your loan amount is then the amount remaining after the down payment is subtracted out.

5. Use the loan amount as your amount financed. "Amount financed" is a term that is specific to home loans. All other loans simply refer to the amount financed as the total amount of the loan provided to the borrower. For these types of loans, simply use the loan amount after the down payment as calculated in this part as your amount financed.



Part 2 Determining the Amount Financed for a Mortgage Loan.

1. Negotiate a price for the asset with the seller. For a home, this will be your accepted offer price. For example, you might talk a homeowner down to selling a property for $100,000.

2. Subtract any deposits. Home purchases may have required a "good faith" deposit. Other purchases may also require a deposit be made while bidding on or reserving the item. This deposit is typically paid upon submission of an offer to purchase. This money is then subtracted from the purchase price, as you have already paid it.

Deposits are either returned (depending upon terms) or converted into the down payment amount and/or closing costs.

For example, if you put in a $3,000 good faith deposit on a $100,000 home, you would subtract this from the $100,000 to get $97,000.

3. Finalize the loan amount. The portion of the original purchase price remaining after these deductions is your loan amount, assuming you are planning on financing the purchase. This amount must be borrowed from a lender and then repaid over a period of time per a loan agreement. The loan amount is the amount borrowed from the lender, not the amount that will eventually be repaid in total, which also includes interest expenses.

4. Deduct the down payment amount. The down payment is paid in full upon closing the sale. It is generally a percentage of the total purchase price and is designed to provide security for the lender in the event of default. Therefore, it is not included in the amount financed.

Many mortgage lenders require 20 percent down on a real estate transaction, although you may be able to secure an FHA-backed mortgage requiring as little as 5 percent down payment. A lower loan balance results in less interest expense and the possible requirement of mortgage insurance.

A lower downpayment is expected on government- guaranteed loans such as FHA or VA because the lender has recourse to the Federal government in the event of default.

For example, if you paid a 20 percent down payment on the $100,000 house purchase, which would be $20,000, you would subtract this from your total.

Your good faith deposit may be applied towards your down payment. This means that the loan amount would still be the purchase price minus the down payment, which is $80,000 in this case.

5. Understand how amount financed differs from the loan amount. "Amount financed" is a term set by the 1968 Truth in Lending Act to describe how much credit is provided to a borrower when they take out a home loan. It is calculated by subtracting prepaid fees and finance charges from the loan amount, since these fees are paid at closing simultaneously with the execution of the loan documents. This means that the amount financed is always less than the actual loan amount. The amount financed is provided to borrowers on the Truth in Lending Disclosure Statement, which is supplied after you apply for a home loan.

6. Add up prepaid fees. Prepaid fees are subtracted from the loan amount to arrive at the amount financed. These fees include prepaid points, homeowners association fees, mortgage insurance, and escrow company fees. They also include lender fees like underwriting fees, tax service, process fees, and prepaid interest. Add all of these fees up to arrive a total prepaid fees amount.

7. Subtract total prepaid fees from the loan amount. Subtract all of the prepaid fees from the loan amount to get your amount financed. This information will also be available on your Truth in Lending Disclosure Statement.[9]



Part 3 Using the Amount Financed.

1. Compare different lenders. If you have the amount financed for a mortgage loan, you can use this information to compare different lenders by looking at the associated fees and interest rates. This information is provided on the Truth in Lending Disclosure Statement, which is provided by all lenders to loan applicants. If you instead are financing another purchase, you can use your amount of financing required to apply to a variety of loans and look for the best combination of fees and interest rate.

2. Calculate the amount of interest you will pay. Your loan will likely be charged compound interest as you pay it off. Compound interest paid increases with the loan duration, the interest rate, and the compounding frequency (how often the compound interest is calculated each year). When you have the amount financed, you can use online interest calculators to determine how much interest you will pay on loans with different loan terms. A longer, higher-interest loan will end up costing you much more money in the long run than a shorter-term, low-interest loan.

For more information, see how to calculate interest payments.

3. Calculate loan payments. If you know how much you need to borrower (your loan amount), you can use this information to check for loan rates online. Check loan aggregator sites to find interest rates for the type and size of loan that you need. Then, input this information into an online loan calculator to figure out what your monthly payments might be. The Financial Industry Regulatory Authority (FINRA) provides a good calculator at http://apps.finra.org/Calcs/1/Loan.

4. Assess your ability to afford a purchase. Once you have an idea of the monthly loan payments, you can use this information to figure out how much you can afford to take out in a loan. Assess your ability to afford the loan by starting with your monthly after-tax income. Then, subtract any existing debt payments (mortgage, auto, etc.), monthly expenses like utilities and food, and savings or contributions to an emergency fund. The amount left is money that you can afford to pay towards a new loan's monthly payment.

Most financial planners suggest limiting house payments plus taxes and insurance to 25 to 28 percent of take-home income.

For example, if your household net income is $7,000 per month, your total outlay for housing should be no more than $1,960 per month.

5. Determine mortgage APR. Your actual mortgage annual percentage rate (APR) is calculated using your amount financed, rather than the loan amount. That is, your actual APR will be higher than the interest rate listed on your loan. To calculate your actual APR, find your monthly payment by using your stated interest rate, loan term, and loan amount and entering them into a loan calculator. Then, record your monthly payment and find a loan calculator that allows you to input your monthly payment, loan duration, and loan amount and receive an interest rate as the output. The output will be your actual APR.

A good calculator for this purpose can be found at http://www.thecalculatorsite.com/finance/calculators/interest-rate-calculator.php.



Question : Gomez family has just purchased a $2,574.54 microcomputer. They made a down payment of $574.54. Through the store's installemnt plan, they have agreed to pay $121.00 per month for the next 18 months. What is the amount financed?

Answer : The amount financed is the portion of the purchase price paid for by the installment plan. In this case, it is the $2,574.54 (purchase price) - $574.54 (the down payment), which is $2,000. The amount to be financed does not include the interest paid during the plan, which will be $178.

Question : Selling Price: $258,900. Loan term: 30 months on 5.25% interest rate. Down payment: $64,7325. What will be the amount to be financed?

Answer : You will be financing the selling price plus any fees, minus the down payment.



Tips.

When shopping for real estate, be sure that your price range reflects your planned amount financed. You may be able to afford more or less, depending upon your savings and the amount of a down payment.

Warnings.

The purchase agreement used by many car dealerships is notoriously complicated and confusing. Be certain that you understand every line item in the agreement before signing it when buying a new or used vehicle.

February 10, 2020

How to Calculate Finance Charges on a New Car Loan

How to Calculate Finance Charges on a New Car Loan.

While some people save until they can buy a car in full, most people take out a car loan. This makes newer and better cars more accessible to everyone. However, it also makes car ownership even more expensive in the long run. Before taking out a loan, you should consider the additional money you will pay in interest for the duration of your loan. These payments, also known as finance charges, will be included in your payments and can be calculated either as monthly payments or as a sum total over the life of your loan.

Part 1 Clarifying the Terms of Your Loan.

1. Determine how much you will borrow. Typically, buyers will make a cash down payment on their new car and borrow from a lender to cover the remaining cost. This borrowed amount, known as the principal, will serve as the basis for your car loan. Keep in mind that you should put as much money down on your car as possible to minimize the amount borrowed and reduce your finance charges.

This step will require you to know roughly how much your new car will cost. See How to Buy a New Car for more information about finding a good price and working within your budget.

2. Figure out the annual percentage rate (APR) and duration of your loan. The APR reflects how much additional money you will have to pay beyond your principal for each year of your loan. A low APR will reduce the yearly and monthly amounts of finance charges on your loan. However, many low-APR loans are longer in duration, so the overall cost may remain relatively high. Alternately, a short-term loan with a higher APR may end up being cheaper overall. This is why it is important to calculate your finance charges beforehand.

Getting a low APR on your car loan may mean seeking other lenders beyond your car dealership. Be sure to do your research and select the cheapest available combination of APR and duration. See How to Get a Low APR on a Car Loan for more information.

3. Find out how many payments you will make each year. The majority of car loan payments are made on a monthly basis. When calculating your monthly payments, you will need to know both how many payments you will make each year and how many payments you will make in total. This information can be easily found in the terms of your car loan.

Part 2 Calculating Your Monthly Finance Charges.

1. Save time by using an online calculator. There are many car loan payment calculators available for free online. Take advantage of these free services if you don't want to spend the time calculating your payments yourself. Search "Car loan payment calculator" and you will be provided with many options. If you still want to work it out by hand, continue to the next step.

2. Find your interest rate due on each payment. Start by converting your APR to a decimal by dividing it by 100. For example, if your APR is stated at 8.4%, 8.4/100 = 0.084. Next, find your monthly percentage rate by dividing your APR decimal by 12. So, 0.084/12 = 0.007. This is your monthly percentage rate expressed as a decimal.

3. Multiply your monthly percentage rate times your principal. If, for example, your principal were $20,000 (if you borrowed $20,000 to buy your car), you would multiply this by 0.007 (from the previous step) and get 140.

4. Input this number into the monthly payment formula. The formula is as follows: Monthly Payment = (Interest rate due on each payment x principal)/ (1 – (1 + Interest rate due on each payment)^ -(Number of payments)). The top part of the equation (interest rate due on each payment x principal) is your number from the previous step. The rest can be calculated using a simple calculator.

The "^" indicates that the figure (-(Number of Payments)) is an exponent to the figure (1 + Interest rate due on each payment). On a calculator, this is entered by calculating 1 + interest rate due on each payment, hitting the button x^y, and then entering the number of payments. Keep in mind that the number of payments is made negative here (multiplied by negative one).

In our example, the calculation would go as follows (assuming a loan duration of 5 years or 60 months):

Monthly Payment = (0.007 x $20000)/(1-(1+ 0.007)^-60.

Monthly payment = $140/(1-(1.007)^-60).

Monthly payment = $140/(1-0.658).

Monthly payment = $140/0.342.

Monthly payment = $409.36 (this number may be off by a few cents due to rounding).

5. Calculate the amount of principal paid each month. This is done by simply dividing your principal amount by the duration of your loan in months. For our example, this would be $20,000/60 months = $333.33/month.

6. Subtract your principal paid each month from your monthly payment. In our example, this would be $409.36 - $333.33. This equals roughly $76. So, with this loan agreement, you would be spending $76 per month in interest payments alone.

Part 3 Calculating Your Loan's Total Finance Charges.

1. Find your monthly payment. To find your total finance charges over the life of your loan, start by calculating your monthly payment. How to do this is explained in the previous section.

2. Plug that number into the total finance charges formula. The formula is as follows: Monthly Payment Amount x Number of Payments – Amount Borrowed = Total Amount of Finance Charges.

So, in our example, this would be.

$409 x 60 - $20,000 = Total amount of finance charges.

$24,540 - $20,000 = Total amount of finance charges.

Total amount of finance charges = $4,540.

3. Check your work. To be sure that you calculated your total correctly, divide that number by the total number of payments (60, in this case). $4,540/60 = 76. If the result matches your monthly finance charges you calculated earlier, then you have the correct number for total finance charges.

Tips.

Use this process to compare loan plans to ensure that you end up with the lowest possible value for overall finance charges.

Using an online loan calculator will always be simpler and more convenient than working out the numbers on your own. These online calculators are always accurate.

The calculator included on most smartphones is capable of doing the math here. If you don't have a smart phone or calculator to use, try typing your equation into Google's search bar, as it will solve most simple problems.

With good credit and a large down payment, it may be possible to get a car loan with 0% APR.

Warnings.

While uncommon, some lenders can use a more complicated form of interest called compound interest that will throw off these calculations. Be sure to ask if your car loan charges simple interest (the kind described in this article) before counting on these equations.

November 28, 2019

how to calculate finance charges on a new car loan

How to Calculate Finance Charges on a New Car Loan.

While some people save until they can buy a car in full, most people take out a car loan. This makes newer and better cars more accessible to everyone. However, it also makes car ownership even more expensive in the long run. Before taking out a loan, you should consider the additional money you will pay in interest for the duration of your loan. These payments, also known as finance charges, will be included in your payments and can be calculated either as monthly payments or as a sum total over the life of your loan.

Part 1 Clarifying the Terms of Your Loan.

1. Determine how much you will borrow. Typically, buyers will make a cash down payment on their new car and borrow from a lender to cover the remaining cost. This borrowed amount, known as the principal, will serve as the basis for your car loan. Keep in mind that you should put as much money down on your car as possible to minimize the amount borrowed and reduce your finance charges.

This step will require you to know roughly how much your new car will cost. See How to Buy a New Car for more information about finding a good price and working within your budget.

2. Figure out the annual percentage rate (APR) and duration of your loan. The APR reflects how much additional money you will have to pay beyond your principal for each year of your loan. A low APR will reduce the yearly and monthly amounts of finance charges on your loan. However, many low-APR loans are longer in duration, so the overall cost may remain relatively high. Alternately, a short-term loan with a higher APR may end up being cheaper overall. This is why it is important to calculate your finance charges beforehand.

Getting a low APR on your car loan may mean seeking other lenders beyond your car dealership. Be sure to do your research and select the cheapest available combination of APR and duration. See How to Get a Low APR on a Car Loan for more information.

3. Find out how many payments you will make each year. The majority of car loan payments are made on a monthly basis. When calculating your monthly payments, you will need to know both how many payments you will make each year and how many payments you will make in total. This information can be easily found in the terms of your car loan.

Part 2 Calculating Your Monthly Finance Charges.

1. Save time by using an online calculator. There are many car loan payment calculators available for free online. Take advantage of these free services if you don't want to spend the time calculating your payments yourself. Search "Car loan payment calculator" and you will be provided with many options. If you still want to work it out by hand, continue to the next step.

2. Find your interest rate due on each payment. Start by converting your APR to a decimal by dividing it by 100. For example, if your APR is stated at 8.4%, 8.4/100 = 0.084. Next, find your monthly percentage rate by dividing your APR decimal by 12. So, 0.084/12 = 0.007. This is your monthly percentage rate expressed as a decimal.

3. Multiply your monthly percentage rate times your principal. If, for example, your principal were $20,000 (if you borrowed $20,000 to buy your car), you would multiply this by 0.007 (from the previous step) and get 140.

4. Input this number into the monthly payment formula. The formula is as follows: Monthly Payment = (Interest rate due on each payment x principal)/ (1 – (1 + Interest rate due on each payment)^ -(Number of payments)). The top part of the equation (interest rate due on each payment x principal) is your number from the previous step. The rest can be calculated using a simple calculator.

The "^" indicates that the figure (-(Number of Payments)) is an exponent to the figure (1 + Interest rate due on each payment). On a calculator, this is entered by calculating 1 + interest rate due on each payment, hitting the button x^y, and then entering the number of payments. Keep in mind that the number of payments is made negative here (multiplied by negative one).

In our example, the calculation would go as follows (assuming a loan duration of 5 years or 60 months):

Monthly Payment = (0.007 x $20000)/(1-(1+ 0.007)^-60.

Monthly payment = $140/(1-(1.007)^-60).

Monthly payment = $140/(1-0.658).

Monthly payment = $140/0.342.

Monthly payment = $409.36 (this number may be off by a few cents due to rounding).

5. Calculate the amount of principal paid each month. This is done by simply dividing your principal amount by the duration of your loan in months. For our example, this would be $20,000/60 months = $333.33/month.

6. Subtract your principal paid each month from your monthly payment. In our example, this would be $409.36 - $333.33. This equals roughly $76. So, with this loan agreement, you would be spending $76 per month in interest payments alone.

Part 3 Calculating Your Loan's Total Finance Charges.

1. Find your monthly payment. To find your total finance charges over the life of your loan, start by calculating your monthly payment. How to do this is explained in the previous section.

2. Plug that number into the total finance charges formula. The formula is as follows: Monthly Payment Amount x Number of Payments – Amount Borrowed = Total Amount of Finance Charges.

So, in our example, this would be.

$409 x 60 - $20,000 = Total amount of finance charges.

$24,540 - $20,000 = Total amount of finance charges.

Total amount of finance charges = $4,540.

3. Check your work. To be sure that you calculated your total correctly, divide that number by the total number of payments (60, in this case). $4,540/60 = 76. If the result matches your monthly finance charges you calculated earlier, then you have the correct number for total finance charges.

Tips.

Use this process to compare loan plans to ensure that you end up with the lowest possible value for overall finance charges.

Using an online loan calculator will always be simpler and more convenient than working out the numbers on your own. These online calculators are always accurate.

The calculator included on most smartphones is capable of doing the math here. If you don't have a smart phone or calculator to use, try typing your equation into Google's search bar, as it will solve most simple problems.

With good credit and a large down payment, it may be possible to get a car loan with 0% APR.

Warnings.

While uncommon, some lenders can use a more complicated form of interest called compound interest that will throw off these calculations. Be sure to ask if your car loan charges simple interest (the kind described in this article) before counting on these equations.

November 28, 2019

how to finance investment property

How to Finance Investment Property.

You might find the perfect investment property, but before you can buy it you need to obtain financing. Many people will go to a bank and ask for a conventional loan with a repayment period of 25-30 years. Before doing so, however, you should analyze your credit history to check that you are a good credit risk. You have more options than simply relying on a conventional loan. For example, you could cash out the equity in your home or seek owner financing of the investment property.

Method 1 Obtaining a Conventional Loan.

1. Pull together a down payment. You can’t rely on mortgage insurance to cover your investment property. Accordingly, you will need a sizeable down payment, around 20-25%.

2. Consider a neighborhood bank. Smaller banks might be more flexible about lending to you if you don’t have a large down payment or if your credit score isn’t perfect. Local banks also may have a stronger interest in lending for local investment, so they are a good option.

You might not know anything about smaller lenders, so you should do as much research as possible. Ask people that you know whether they have ever done business with the bank.

You can also check online. Look for reviews.

3. Gather necessary paperwork. Before approaching a lender, you should pull together required paperwork. Doing so ahead of time will speed up the process. Get the following.

two months of bank statements, prior two months’ statements for investment accounts and retirement accounts, last two pay stubs.

information about self-employed income, such as last two year’s tax returns or business financial statements, driver’s license.

Social Security card, papers related to bankruptcy, divorce, or separation (if applicable).

4. Work with a mortgage broker. A mortgage broker will apply for loans on your behalf with many different lenders and will compare the rates. The broker can also try to negotiate better terms for you. Using a mortgage broker is a good idea if you are too busy to comparison shop by going to many different lenders.

Mortgage brokers don’t work for free. You typically will pay about 1% of the loan amount. For example, if you borrow $250,000, then you can expect to pay around $2,500 to the mortgage broker.

You can ask other investors or a real estate agent for a referral to a broker. Before hiring, make sure that you interview the person and ask how much experience they have and what services they offer.

5. Compare loans. If you don’t want to work with a mortgage broker, then you will need to educate yourself about the basics of home financing. You might be an experienced pro who has borrowed before. However, if you haven’t, then remember to consider the following when comparing loans.

Interest rates. An interest rate is a percent of the loan amount that you pay as a privilege for borrowing the money. Interest rates can be fixed for the entire length of the loan or fixed for only a portion of the loan term.

Discount points. For some loans, you can pay points, which will lower your interest rate.

Loan term. This is the length of the loan. A shorter loan will cost more each month, but you will pay it off sooner and with less interest.

Origination charge. This amount of money covers document preparation, fees, and the costs of underwriting the loan.

6. Seek pre-approval. You should try to get pre-approved for a loan before searching for properties. Make sure to request the pre-approval in writing because sellers might want to see that you are pre-approved.

7. Don’t forget other team members. Purchasing investment property requires the expertise of many different professionals. You should begin assembling your team early—even before you get financing. You will probably need the help of the following people.

An accountant who can help you understand investment tax strategies.

A realtor who can help you sign an appropriate real estate contract.

An attorney who can help you protect your assets, for example by forming a limited liability company to hold the property.

An insurance agent.

Method 2 Using Other Finance Options.

1. Use the equity in your home. You might be able to use the equity in your current home to purchase an investment property. Generally, you can borrow around 80% of your home’s value. There are different ways you can tap the equity in your home, such as the following.

You could get a Home Equity Line of Credit (HELOC). A lender will approve you for a specific amount of credit, and you use your current home as collateral for the loan. The credit is available for a certain amount of time. At the end of this draw period, you must have paid back the loan.

You might also get a cash-out refinance. The lender will pay you the difference between the mortgage and the home’s value, but is usually limited to 80-90% of the home’s value. For example, if you have $20,000 remaining on your mortgage, but your home is valued at $220,000, then $200,000 could be available. You could get 80-90% of $200,000 ($160,000-180,000). This option usually has a lower interest rate than a HELOC.

Both a HELOC and a cash-out refinance put your home at risk if you can’t make repayments. For this reason, you should think carefully before tapping the equity in your home to finance investments.

2. Obtain a fix-and-flip loan. You might be able to get this type of loan if you want to purchase a property in order to renovate and then quickly sell. The loan will be short-term and is secured by the property. Fix-and-flip loans have high interest rates, so you need to renovate and sell quickly.

You might find it easier to qualify for a fix-and-flip loan compared to a conventional loan. However, lenders will still look at your credit history and income.

The lender will also want to know the estimated value after repair, which can impact whether they extend you a loan and the terms.

3. Research peer-to-peer lending sites. Peer-to-peer lending connects investors with lenders who are willing to lend. Two of the more well-known peer-to-peer lending sites are Prosper and LendingClub.

Peer-to-peer lenders will require that you complete an application. They look at your credit score and credit history. They may also have minimum credit scores in order to qualify.

You might not be able to get a large personal loan through peer-to-peer lending. However, small businesses can typically borrow more, so if you create an LLC then you might be able to borrow up to $100,000.

4. Find a business partner. You might not be able to secure a loan on your own, in which case you will need to consider other options. One option is to find a business partner who you can invest with.

You will want to screen any potential business partner, just as a bank would screen you. If you are counting on the partner to help pay for the loan, then you will need to check their credit history and employment.

You also need to consider how you will hold the investment property. For example, it might be best to create an LLC and to both be owners of the LLC. The LLC will then hold title to the investment property.

5. Consider owner financing. With owner financing, the owner lends you the money that you use to buy the property. Sometimes the owner will lend only a portion of the price, which you then supplement with a conventional loan. You should analyze the pros and cons of owner financing.

A benefit of owner financing is that an owner might be willing to lend if you don’t have perfect credit or a huge down payment available. You and the owner can work out loan terms that are acceptable to both of you.

Typically, the seller’s loan will be for a short period of time (such as five years). At the end of the term, you are obligated to pay off the loan with a “balloon payment.” This usually means you need to get a conventional loan to make this balloon payment. You should analyze your credit to see if you can qualify for a conventional loan in the near future.

See Owner Finance a Home for more information.

Method 3 Analyzing Your Credit Score.

1. Obtain a free copy of your credit report. Your credit score will have the largest impact on your ability to get a loan, so you should obtain a copy of your credit report.[18] You are entitled to one free credit report each year from the three national Credit Reporting Agencies (CRAs). You shouldn’t contact the CRAs individually. Instead, you can get your free copy from all three using one of the following methods.

Complete the Annual Credit Report Request Form, which is available here: https://www.consumer.ftc.gov/articles/pdf-0093-annual-report-request-form.pdf. Once completed, submit the form to Annual Credit Report Request Service, PO Box 105281, Atlanta, GA 30348-5281.

2. Find errors on your credit report. You should closely look at you credit reports to find any errors that might lower your credit score. If your score is below 740, then you will probably have to pay more to borrow. For this reason, you should do whatever you can to increase the score. Look for the following errors.

credit information from an ex-spouse, credit information from someone with a similar name, address, Social Security Number, etc.

incorrect payment status (e.g., stating you are late when you aren’t), a delinquent account reported more than once.

old information that should have fallen off your credit report, an account inaccurately identified as closed by the lender.

failure to note when delinquencies have been remedied.

3. Consider whether you should fix certain problems. There may be negative information on your credit report that you want to fix. For example, you might want to pay an old collections account. However, you should think carefully before fixing certain problems.

Negative information must fall off your credit report after a certain amount of time. For example, an account in collections should fall off after seven years. If the account is six years old, you might want to wait and let it fall off rather than pay it off.

If you need help considering what to do, then you should consult with an attorney who can advise you.

4. Fix errors. You can correct errors by contacting each CRA online or by writing a letter. To protect yourself, you should probably do both. Mail your letter certified mail, return receipt requested.

The Federal Trade Commission has a sample letter you can use: https://www.consumer.ftc.gov/articles/0384-sample-letter-disputing-errors-your-credit-report.

See Dispute Credit Report Errors for more information on how to fix errors.

December 15, 2019

How to Finance Investment Property

How to Finance Investment Property.

You might find the perfect investment property, but before you can buy it you need to obtain financing. Many people will go to a bank and ask for a conventional loan with a repayment period of 25-30 years. Before doing so, however, you should analyze your credit history to check that you are a good credit risk. You have more options than simply relying on a conventional loan. For example, you could cash out the equity in your home or seek owner financing of the investment property.

Method 1 Obtaining a Conventional Loan.

1. Pull together a down payment. You can’t rely on mortgage insurance to cover your investment property. Accordingly, you will need a sizeable down payment, around 20-25%.

2. Consider a neighborhood bank. Smaller banks might be more flexible about lending to you if you don’t have a large down payment or if your credit score isn’t perfect. Local banks also may have a stronger interest in lending for local investment, so they are a good option.

You might not know anything about smaller lenders, so you should do as much research as possible. Ask people that you know whether they have ever done business with the bank.

You can also check online. Look for reviews.

3. Gather necessary paperwork. Before approaching a lender, you should pull together required paperwork. Doing so ahead of time will speed up the process. Get the following.

two months of bank statements, prior two months’ statements for investment accounts and retirement accounts, last two pay stubs.

information about self-employed income, such as last two year’s tax returns or business financial statements, driver’s license.

Social Security card, papers related to bankruptcy, divorce, or separation (if applicable).

4. Work with a mortgage broker. A mortgage broker will apply for loans on your behalf with many different lenders and will compare the rates. The broker can also try to negotiate better terms for you. Using a mortgage broker is a good idea if you are too busy to comparison shop by going to many different lenders.

Mortgage brokers don’t work for free. You typically will pay about 1% of the loan amount. For example, if you borrow $250,000, then you can expect to pay around $2,500 to the mortgage broker.

You can ask other investors or a real estate agent for a referral to a broker. Before hiring, make sure that you interview the person and ask how much experience they have and what services they offer.

5. Compare loans. If you don’t want to work with a mortgage broker, then you will need to educate yourself about the basics of home financing. You might be an experienced pro who has borrowed before. However, if you haven’t, then remember to consider the following when comparing loans.

Interest rates. An interest rate is a percent of the loan amount that you pay as a privilege for borrowing the money. Interest rates can be fixed for the entire length of the loan or fixed for only a portion of the loan term.

Discount points. For some loans, you can pay points, which will lower your interest rate.

Loan term. This is the length of the loan. A shorter loan will cost more each month, but you will pay it off sooner and with less interest.

Origination charge. This amount of money covers document preparation, fees, and the costs of underwriting the loan.

6. Seek pre-approval. You should try to get pre-approved for a loan before searching for properties. Make sure to request the pre-approval in writing because sellers might want to see that you are pre-approved.

7. Don’t forget other team members. Purchasing investment property requires the expertise of many different professionals. You should begin assembling your team early—even before you get financing. You will probably need the help of the following people.

An accountant who can help you understand investment tax strategies.

A realtor who can help you sign an appropriate real estate contract.

An attorney who can help you protect your assets, for example by forming a limited liability company to hold the property.

An insurance agent.

Method 2 Using Other Finance Options.

1. Use the equity in your home. You might be able to use the equity in your current home to purchase an investment property. Generally, you can borrow around 80% of your home’s value. There are different ways you can tap the equity in your home, such as the following.

You could get a Home Equity Line of Credit (HELOC). A lender will approve you for a specific amount of credit, and you use your current home as collateral for the loan. The credit is available for a certain amount of time. At the end of this draw period, you must have paid back the loan.

You might also get a cash-out refinance. The lender will pay you the difference between the mortgage and the home’s value, but is usually limited to 80-90% of the home’s value. For example, if you have $20,000 remaining on your mortgage, but your home is valued at $220,000, then $200,000 could be available. You could get 80-90% of $200,000 ($160,000-180,000). This option usually has a lower interest rate than a HELOC.

Both a HELOC and a cash-out refinance put your home at risk if you can’t make repayments. For this reason, you should think carefully before tapping the equity in your home to finance investments.

2. Obtain a fix-and-flip loan. You might be able to get this type of loan if you want to purchase a property in order to renovate and then quickly sell. The loan will be short-term and is secured by the property. Fix-and-flip loans have high interest rates, so you need to renovate and sell quickly.

You might find it easier to qualify for a fix-and-flip loan compared to a conventional loan. However, lenders will still look at your credit history and income.

The lender will also want to know the estimated value after repair, which can impact whether they extend you a loan and the terms.

3. Research peer-to-peer lending sites. Peer-to-peer lending connects investors with lenders who are willing to lend. Two of the more well-known peer-to-peer lending sites are Prosper and LendingClub.

Peer-to-peer lenders will require that you complete an application. They look at your credit score and credit history. They may also have minimum credit scores in order to qualify.

You might not be able to get a large personal loan through peer-to-peer lending. However, small businesses can typically borrow more, so if you create an LLC then you might be able to borrow up to $100,000.

4. Find a business partner. You might not be able to secure a loan on your own, in which case you will need to consider other options. One option is to find a business partner who you can invest with.

You will want to screen any potential business partner, just as a bank would screen you. If you are counting on the partner to help pay for the loan, then you will need to check their credit history and employment.

You also need to consider how you will hold the investment property. For example, it might be best to create an LLC and to both be owners of the LLC. The LLC will then hold title to the investment property.

5. Consider owner financing. With owner financing, the owner lends you the money that you use to buy the property. Sometimes the owner will lend only a portion of the price, which you then supplement with a conventional loan. You should analyze the pros and cons of owner financing.

A benefit of owner financing is that an owner might be willing to lend if you don’t have perfect credit or a huge down payment available. You and the owner can work out loan terms that are acceptable to both of you.

Typically, the seller’s loan will be for a short period of time (such as five years). At the end of the term, you are obligated to pay off the loan with a “balloon payment.” This usually means you need to get a conventional loan to make this balloon payment. You should analyze your credit to see if you can qualify for a conventional loan in the near future.

See Owner Finance a Home for more information.

Method 3 Analyzing Your Credit Score.

1. Obtain a free copy of your credit report. Your credit score will have the largest impact on your ability to get a loan, so you should obtain a copy of your credit report.[18] You are entitled to one free credit report each year from the three national Credit Reporting Agencies (CRAs). You shouldn’t contact the CRAs individually. Instead, you can get your free copy from all three using one of the following methods.

Complete the Annual Credit Report Request Form, which is available here: https://www.consumer.ftc.gov/articles/pdf-0093-annual-report-request-form.pdf. Once completed, submit the form to Annual Credit Report Request Service, PO Box 105281, Atlanta, GA 30348-5281.

2. Find errors on your credit report. You should closely look at you credit reports to find any errors that might lower your credit score. If your score is below 740, then you will probably have to pay more to borrow. For this reason, you should do whatever you can to increase the score. Look for the following errors.

credit information from an ex-spouse, credit information from someone with a similar name, address, Social Security Number, etc.

incorrect payment status (e.g., stating you are late when you aren’t), a delinquent account reported more than once.

old information that should have fallen off your credit report, an account inaccurately identified as closed by the lender.

failure to note when delinquencies have been remedied.

3. Consider whether you should fix certain problems. There may be negative information on your credit report that you want to fix. For example, you might want to pay an old collections account. However, you should think carefully before fixing certain problems.

Negative information must fall off your credit report after a certain amount of time. For example, an account in collections should fall off after seven years. If the account is six years old, you might want to wait and let it fall off rather than pay it off.

If you need help considering what to do, then you should consult with an attorney who can advise you.

4. Fix errors. You can correct errors by contacting each CRA online or by writing a letter. To protect yourself, you should probably do both. Mail your letter certified mail, return receipt requested.

The Federal Trade Commission has a sample letter you can use: https://www.consumer.ftc.gov/articles/0384-sample-letter-disputing-errors-your-credit-report.

See Dispute Credit Report Errors for more information on how to fix errors.

December 15, 2019

How to Calculate Compound Interest

How to Calculate Compound Interest.

Compound interest is distinct from simple interest in that interest is earned both on the original investment (the principal) and the interest accumulated so far, rather than simply on the principal. Because of this, accounts with compound interest grow faster than those with simple interest. Additionally, the value will grow even faster if the interest is compounded multiple times per year. Compound interest is offered on a variety of investment products and also charged on certain types of loans, like credit card debt. Calculating how much an amount will grow under compound interest is simple with the right equations.

Part 1 Finding Annual Compound Interest.
1. Define annual compounding. The interest rate stated on your investment prospectus or loan agreement is an annual rate. If your car loan, for example, is a 6% loan, you pay 6% interest each year. Compounding once at the end of the year is the easiest calculation for compounding interest.
A debt may compound interest annually, monthly or even daily.
The more frequently your debt compounds, the faster you will accumulate interest.
You can look at compound interest from the investor or the debtor’s point of view. Frequent compounding means that the investor’s interest earnings will increase at a faster rate. It also means that the debtor will owe more interest while the debt is outstanding.
For example, a savings account may be compounded annually, while a pay-day loan can be compounded monthly or even weekly.
2. Calculate interest compounding annually for year one. Assume that you own a $1,000, 6% savings bond issued by the US Treasury. Treasury savings bonds pay out interest each year based on their interest rate and current value.
Interest paid in year 1 would be $60 ($1,000 multiplied by 6% = $60).
To calculate interest for year 2, you need to add the original principal amount to all interest earned to date. In this case, the principal for year 2 would be ($1,000 + $60 = $1,060). The value of the bond is now $1,060 and the interest payment will be calculated from this value.
3. Compute interest compounding for later years. To see the bigger impact of compound interest, compute interest for later years. As you move from year to year, the principal amount continues to grow.
Multiply the year 2 principal amount by the bond’s interest rate. ($1,060 X 6% = $63.60). The interest earned is higher by $3.60 ($63.60 - $60.00). That’s because the principal amount increased from $1,000 to $1,060.
For year 3, the principal amount is ($1,060 + $63.60 = $1,123.60). The interest earned in year 3 is $67.42. That amount is added to the principal balance for the year 4 calculation.
The longer a debt is outstanding, the bigger the impact of compounding interest. Outstanding means that the debt is still owed by the debtor.
Without compounding, the year 2 interest would simply be ($1,000 X 6% = $60). In fact, every year’s interest earned would be $60 if you did earn compound interest. This is known as simple interest.
4. Create an excel document to compute compound interest. It can be handy to visualize compound interest by creating a simple model in excel that shows the growth of your investment. Start by opening a document and labeling the top cell in columns A, B, and C "Year," "Value," and "Interest Earned," respectively.
Enter the years (0-5) in cells A2 to A7.
Enter your principal in cell B2. For example, imagine you are started with $1,000. Input 1000.
In cell B3, type "=B2*1.06" and press enter. This means that your interest is being compounded annually at 6% (0.06). Click on the lower right corner of cell B3 and drag the formula down to cell B7. The numbers will fill in appropriately.
Place a 0 in cell C2. In cell C3, type "=B3-B$2" and press enter. This should give you the difference between the values in cell B3 and B2, which represents the interest earned. Click on the lower right corner of cell C3 and drag the formula down to cell C7. The values will fill themselves in.
Continue this process to replicate the process for as many years as you want to track. You can also easily change values for principal and interest rate by altering the formulas used and cell contents.

Part 2 Calculating Compound Interest on Investments.
1. Learn the compound interest formula. The compound interest formula solves for the future value of the investment after set number of years. The formula itself is as follows: {\displaystyle FV=P(1+{\frac {i}{c}})^{n*c}}FV=P(1+{\frac  {i}{c}})^{{n*c}} The variables within the equation are defined as follows:
"FV" is the future value. This is the result of the calculation.
"P" is your principal.
"i" represents the annual interest rate.
"c" represents the compounding frequency (how many times the interest compounds each year).
"n" represents the number of years being measured.
2. Gather variables the compound interest formula. If interest compounds more often than annually, it is difficult to calculate the formula manually. You can use a compound interest formula for any calculation. To use the formula, you need to gather the following information.
Identify the principal of the investment. This is the original amount of your investment. This could be how much you deposited into the account or the original cost of the bond. For example, imagine your principal in an investment account is $5,000.
Locate the interest rate for the debt. The interest rate should be an annual amount, stated as a percentage of the principal. For example, a 3.45% interest rate on the $5,000 principal value.
In the calculation, the interest rate will have to be input as decimal. Convert it by dividing the interest rate by 100. In this example, this would be 3.45%/100 = 0.0345.
You also need to know how often the debt compounds. Typically, interest compounds annually, monthly or daily. For example, imagine that it compounds monthly. This means your compounding frequency ("c") would be input as 12.
Determine the length of time you want to measure. This could be a goal year for growth, like 5 or 10 years, or this maturity of a bond. The maturity date of a bond is the date that the principal amount of the debt is to be repaid. For the example, we use 2 years, so input 2.
3. Use the formula. Input your variables in the right places. Check again to make sure that you are inputting them correctly. Specifically, make sure that your interest rate is in decimal form and that you have used the right number for "c" (compounding frequency).
The example investment would be input as follows: {\displaystyle FV=\$5000(1+{\frac {0.0345}{12}})^{2*12}}FV=\$5000(1+{\frac  {0.0345}{12}})^{{2*12}}
Compute the exponent portion and the portion of the formula in parenthesis separately. This is a math concept called order of operations. You can learn more about the concept using this link: Apply the Order of Operations.
4. Finish the math computations in the formula. Simplify the problem by solving for the parts of the equation in parenthesis first, beginning with the fraction.
Divide the fraction within parentheses first. The result should be: {\displaystyle FV=\$5000(1+0.00288)^{2*12}}FV=\$5000(1+0.00288)^{{2*12}}
Add the numbers within parentheses. The result should be: {\displaystyle FV=\$5000(1.00288)^{2*12}}FV=\$5000(1.00288)^{{2*12}}
Solve the multiplication within the exponent (the last part above the closing parenthesis). The result should look like this: {\displaystyle FV=\$5000(1.00288)^{24}}FV=\$5000(1.00288)^{{24}}
Raise the number within the parentheses to the power of the exponent. This can be done on a calculator by entering the value in parentheses (1.00288 in the example) first, pressing the {\displaystyle x^{y}}x^{y} button, then entering the exponent (24 in this case) and pressing enter. The result in the example is {\displaystyle FV=\$5000(1.0715)}FV=\$5000(1.0715)
Finally, multiply the principal by the number in parentheses. The result in the example is $5,000*1.0715, or $5,357.50. This is the value of the account at the end of the two years.
5. Subtract the principal from your answer. This will give you the amount of interest earned.
Subtract the principal of $5,000 from the future value of $5357.50 to get $5,375.50-$5,000, or $357.50
You will earn $357.50 in interest over the two years.

Part 3 Calculating Compound Interest With Regular Payments.
1. Learn the formula. Compounding interest accounts can increase even faster if you make regular contributions to them, such as adding a monthly amount to a savings account. The formula is longer than that used to calculate compound interest without regular payments, but follows the same principles. The formula is as follows: {\displaystyle FV=P(1+{\frac {i}{c}})^{n*c}+{\frac {R((1+{\frac {i}{c}})^{n*c}-1)}{\frac {i}{c}}}}FV=P(1+{\frac  {i}{c}})^{{n*c}}+{\frac  {R((1+{\frac  {i}{c}})^{{n*c}}-1)}{{\frac  {i}{c}}}}[7]The variables within the equation are also the same as the previous equation, with one addition.
"P" is the principal.
"i" is the annual interest rate.
"c" is the compounding frequency and represents how many times the interest is compounded each year.
"n" is the number of years.
"R" is the amount of the monthly contribution.
2. Compile the necessary variables. To compute the future value of this type of account, you will need the principal (or present value) of the account, the annual interest rate, the compounding frequency, the number of years being measured, and the amount of your monthly contribution. This information should be in your investment agreement.
Be sure to convert the annual interest rate into a decimal. Do this by dividing the rate by 100. For example, using the above 3.45% interest rate, we would divide 3.45 by 100 to get 0.0345.
For compounding frequency, simply use the number of times per year that the interest compounds. This means annually is 1, monthly is 12, and daily is 365 (don't worry about leap years).
3. Input your variables. Continuing with the example from above, imagine that you decide to also contribute $100 per month to your account. This account, with a principal value of $5,000, compounds monthly and earns 3.45% annual interest. We will measure the growth of the account over two years.
The completed formula using this information is as follows: {\displaystyle FV=\$5,000(1+{\frac {0.0345}{12}})^{2*12}+{\frac {\$100((1+{\frac {0.0345}{12}})^{2*12}-1)}{\frac {0.0345}{12}}}}FV=\$5,000(1+{\frac  {0.0345}{12}})^{{2*12}}+{\frac  {\$100((1+{\frac  {0.0345}{12}})^{{2*12}}-1)}{{\frac  {0.0345}{12}}}}
4. Solve the equation. Again, remember to use the proper order of operations to do so. This means that you start by calculating the values inside of parentheses.
Solve for the fractions with parentheses first. This means dividing "i" by "c" in three places, all for the same result of 0.00288. The equation now looks like this: {\displaystyle FV=\$5,000(1+0.00288)^{2*12}+{\frac {\$100((1+0.00288)^{2*12}-1)}{0.00288}}}FV=\$5,000(1+0.00288)^{{2*12}}+{\frac  {\$100((1+0.00288)^{{2*12}}-1)}{0.00288}}
Solve the addition within the parentheses. This means adding the 1 to the result from the last part. This gives: {\displaystyle FV=\$5,000(1.00288)^{2*12}+{\frac {\$100((1.00288)^{2*12}-1)}{0.00288}}}FV=\$5,000(1.00288)^{{2*12}}+{\frac  {\$100((1.00288)^{{2*12}}-1)}{0.00288}}
Solve the multiplication within the exponents. This means multiplying the two numbers that are smaller and above the closing parentheses. In the example, this is 2*12 for a result of 24. This gives: {\displaystyle FV=\$5,000(1.00288)^{24}+{\frac {\$100((1.00288)^{24}-1)}{0.00288}}}FV=\$5,000(1.00288)^{{24}}+{\frac  {\$100((1.00288)^{{24}}-1)}{0.00288}}
Solve the exponents. This means raising the amount within parentheses to the result of the last step. On a calculator, this is done by entering the value in parentheses (1.00288 in the example), pressing the {\displaystyle x^{y}}x^{y} key, and then entering the exponent value (which is 24 here). This gives: {\displaystyle FV=\$5,000(1.0715)+{\frac {\$100(1.0715-1)}{0.00288}}}FV=\$5,000(1.0715)+{\frac  {\$100(1.0715-1)}{0.00288}}
Subtract. Subtract the one from the result of the last step in the right part of the equation (here 1.0715 minus 1). This gives: {\displaystyle FV=\$5,000(1.0715)+{\frac {\$100(0.0715)}{0.00288}}}FV=\$5,000(1.0715)+{\frac  {\$100(0.0715)}{0.00288}}
Multiply. This means multiplying the principal by the number is the first set of parentheses and the monthly contribution by the same number in parentheses. This gives: {\displaystyle FV=\$5,357.50+{\frac {\$7.15}{0.00288}}}FV=\$5,357.50+{\frac  {\$7.15}{0.00288}}
Divide the fraction. This gives {\displaystyle FV=\$5,357.50+\$2,482.64}FV=\$5,357.50+\$2,482.64
Add. Finally, add the two number to get the future value of the account. This gives $5,357.50 + $2,482.64, or $7,840.14. This is the value of the account after the two years.
5. Subtract the principal and payments. To find the interest earned, you have to subtract the amount of money you put into the account. This means adding the principal, $5,000, to the total value of contributions made, which is 24 contributions (2 years* 12 months/year) times the $100 you put in each month for a total of $2,400. The total is $5,000 plus $2,400, or $7,400. Subtracting $7,400 from the future value of $7,840.14, you get the amount of interest earned, which is $440.14.
6. Extend your calculation. To really see the benefit of compound interest, imagine that you continue adding money monthly to the same account for twenty years instead of two. In this case, your future value would be about $45,000, even though you will have only contributed $29,000, meaning that you will have earned $16,000 in interest.

FAQ.
Question : What does "to the power of" mean?
Answer : "To the power of" refers to a particular numerical exponent. It is a multiplication in which a number appears as a factor that many times. For example, 2 to the power of 1 equals 2. 2 to the power of 2 equals 2x2, or 4, and 2 to the power of 3 is 2 x 2 x 2, or 8.
Question : How do I find the compound interest on a 29,870 loan at 6% interest?
Answer : First take out the amount by the formulae: principle(1+ r/100) to the power n (number of years), then take out the ci by subtracting the principle from the amount.
Question : What do I type on a calculator to find compound interest?
Answer : Compound interest can be calculated in several ways. The most common is to say that A=Pe^(rt) where P is the initial amount, "e" is a constant around 2.71, "r" is the interest rate (i.e. 7% would be entered in as 0.07), "t" is the duration in which the interest is being calculated in years and "A" is the final amount.
Question : How do I know if it's better to owe interest on something or to pay a lump sum at no interest?
Answer : Cost/value analysis. Calculate the total you'll pay under both methods and find the difference. Then compare that difference to the value of buying now (with a loan) versus later (lump sum).
Question : How do I find the future value and the compound interest if £4000 is invested for 5 years at 42% p.a?
Answer : Principal=$4000, n=5, R=42%,0.42. The formula: FV=PV(1+r)r aise power n and substitute the value.
Question : How do I calculate principal in compound interest?
Answer : Principal = fv = p(1 + i/c)ⁿc. Formula for principal in compound interest (1 + R/100), where R = rate.

Tips.

You can also calculate compound interest easily using an online compound interest calculator. The US Government hosts a good one at https://www.investor.gov/tools/calculators/compound-interest-calculator.
A quick rule of thumb to find compound interest is the "rule of 72." Start by dividing 72 by the amount of the interest your are earning, for example 4%. In this case, this would be 72/4, or 18. This result, 18, is roughly the number of years it will take for your investment to double at the current interest rate. Keep in mind that the rule of 72 is just a quick approximation, not an exact result.[8]
You can also use these calculations to perform "what-if" calculations that can tell you how much you will earn with a given interest rate, principal, compounding frequency, or number of years.

April 09, 2020

How to Be Smart with Money

How to Be Smart with Money.

Being smart with money doesn’t have to involve high risk investments or having thousands of dollars in the bank. No matter what your current situation is, you can be more financially savvy in your everyday life. Start by building a budget to help you stay within your means and prioritize your financial goals. Then, you can work on paying down your debt, building up your savings, and making better spending decisions.

Method 1 Managing Your Budget.
1. Set your financial goals. Understanding what you are working toward will help you build a budget to meet your needs. Do you want to pay down debt? Are you saving for a major purchase? Are you just looking to be more financially stable? Make your top priorities clear so that you can build your budget to fit them.
2. Look at your overall monthly income. A smart budget is one that doesn’t overextend your means. Start by calculating your total monthly income. Include not just the money you get from work, but any cash you get from things like side-hustles, alimony, or child support. If you share expenses with your partner, calculate your combined income to figure out a household budget.
You should aim to have your overall monthly spending not exceed what you bring in. Emergencies and unforeseen occasions happen, but try to set a goal of not using your credit card to cover non-necessary items when your bank accounts are low.
3. Calculate your necessary expenses. Your first priority in building a better budget should be those things that need to be paid every month. Paying these expenses should be your first priority, as these items are not only necessary for daily function, but could also damage your credit if you fail to pay them in full and on time.
Such expenses may include your mortgage or rent, utilities, car payments, and credit card payments, as well as things like your groceries, gas, and insurance.
Set your bills up on autopay to make them easy to prioritize. This way, the money comes right out of your account on the day the bill is due.
4. Factor in your non-essential expenses. Budgets work best when they reflect your daily life. Take a look at your regular, non-essential expenses and build them into your budget so that you can anticipate your spending. If you get a coffee every morning on the way to work, for example, throw that in your budget.
5. Look for places to make cuts. Creating a budget will help you identify things you can cut from your regular expenses and roll into your savings or debt payments. Investing in a good coffee pot and a quality to-go mug, for example, can really help you save long-term on your morning fix.
Don’t just look at daily expenses. Check things like your insurance policies and see if there are places you can scale back. If you are paying for collision and comprehensive insurance on an old car, for example, you may opt to scale back to just liability.
6. Track your monthly spending. A budget is a guideline for your overall spending habits. Your actual spending will vary each month depending upon your personal needs. Track your spending by using an expenses journal, a spreadsheet, or even a budgeting app to help you ensure that you are staying within your means each month.
If you do mess up or go over your budget goals, don’t beat yourself up. Use the opportunity to see if you need to revise your budget to include new expenses. Remind yourself that getting off-target happens to everyone occasionally, and that you can get to where you want to be.
7. Build some savings into your budget. Exactly how much you save will depend upon your job, your personal expenses, and your individual financial goals. You should aim to save something each month, though, whether that’s $50 or $500. Keep that money in a savings account separate from your primary bank account.
This savings should be separate from your 401(k) or any other investments that you have. Building a small general savings will help you protect yourself financially if an emergency comes up, such as a major repair around the house or unexpectedly losing your job.
Many financial experts recommend a target savings of 3-6 months’ worth of expenses. If you have a lot of debt you need to pay down, aim for a partial emergency fund of 1-2 months, then focus the rest of your cash on your debt.

Method 2 Paying Off Debts
1. Figure out how much you owe. To understand how to best pay down your debt, you first need to understand how much you owe. Add together all your debts, including credit cards, short-term loans, student loans, and any mortgages or auto financing you have in your name. Look at your total debt numbers to help you understand how much you owe, and how long it will truly take to pay it off.
2. Prioritize high-interest debts. Debts like credit cards tend to have higher interest rates than things like student loans. The longer your carry a balance on high interest debts, the more you ultimately pay. Prioritize paying down your highest interest debts first, making minimum payments on other debts and putting extra money into your top debt priorities.
If you have a short-term loan like a car title loan, prioritize paying that down as quickly as possible. Such loans can be devastating if not paid off in full and on time.
3. Go straight from paying off one debt to the next. When you pay off one credit card, don’t roll that payment amount back into your discretionary funds. Instead, roll the amount you were paying into your next debt.
If, for example, you finished paying down a credit card, take the amount you were putting toward your credit card and add it to the minimum payment for your student loans.

Method 3 Setting Up Savings.
1. Pick a savings goal. Saving tends to be easier when you know what you’re saving for. Try to set a goal, such as building an emergency fund, saving for a down payment, saving for a major household purchase, or building a retirement fund. If your bank will let you, you can even give your account a nickname such as “Vacation Fund” to help remind you of what you’re working toward.
2. Keep your savings in a separate account. A savings account is generally the easiest place to put your savings if you are just starting out. If you already have a solid emergency fund and have a reasonable amount to invest, such as $1,000, you may consider something like a certificate of deposit (CD). CDs make your money much harder to get to for a fixed period of time, but tend to have a much higher interest rate.
Keeping your savings separate from your checking account will make it harder to spend your savings. Savings accounts also tend to have a slightly higher interest rate than checking accounts.
Many banks will allow you to set up an automatic transfer between your checking and savings accounts. Set up a monthly transfer from your checking to your savings, even if it’s just for a small amount.
3. Invest raises and bonuses. If you get a raise, a bonus, a tax return, or another unexpected windfall, put it in your savings. This is an easy way to help boost your account without compromising your current budget.
If you get a raise, invest the difference between your budgeted salary and your new salary directly into your savings. Since you already have a plan to live off your old salary, you can use the new influx of cash to build your savings.
4. Dedicate your side gig money to your savings. If you work a side gig, build a budget based on your primary source of income and dedicate all your earnings from your side gig to your savings. This will help grow your savings faster while making your budget more comfortable.

Method 4 Spending Money Wisely.
1. Prioritize your needs. Start each budget period by paying for your needs. This should include your rent or mortgage, utility bills, insurance, gas, groceries, recurring medical expenses, and any other expenses you may have. Do not put any money toward non-necessary expenses until all of your necessary living costs have been paid.
2. Shop around. It can be easy to get in the habit of shopping in the same place repeatedly, but taking time shop around can help you find the best deals. Check in stores and online to look for the best prices for your needs. Look for stores that might be running sales, or that specialize in discount or surplus merchandise.
Bulk stores can be useful for buying things you use a lot of, or things that don't expire such as cleaning supplies.
3. Buy clothes and shoes out-of-season. New styles of clothes, shoes, and accessories generally come out seasonally. Shopping out-of-season can help you find better prices on fashion items. Shopping online is particularly useful for out-of-season clothes, as not all stores will have non-seasonal items.
4. Use cash instead of cards. For non-necessary expenses such as going out to eat or seeing a movie, set a budget. Withdraw the necessary amount of cash before you go out, and leave your cards at home. This will make it more difficult to overspend or impulse buy while you're out.
5. Monitor your spending. Ultimately, as long as you're not spending more than you bring in, you're on target. Regularly monitor your spending in whatever way works best for you. You may prefer to check your bank account every day, or you could sign up for a money-monitoring app such as Mint, Dollarbird, or BillGuard to help you track your spending.

April 11, 2020

how to split expenses as a couple

How to Split Expenses As a Couple.

Splitting expenses as a couple is an important aspect of having a stable relationship, especially if you’re living together. There are several ways to split expenses. One way is to split everything right down the middle, so each person pays half. The other way is for each person to pay for what they can afford. The final way is for one person to pay all or most of the expenses. If one of you works little or not at all, that person should make up the difference by contributing energy toward domestic tasks. Finally, ensure you’re covering yourself by keeping separate bank accounts and not cosigning loans with your partner.



Method 1 Choosing the Right Method.

1. Determine what expenses qualify as shared. Sometimes it is easy to identify a shared expense. For instance, heating, water, and electricity are house-wide expenses and you will both, presumably, enjoy their use in approximately equal amounts. But it might be harder to justify sharing other expenses. If you have TV service at your home, for instance, but only one of you watches TV, it makes little sense to split that particular expense.

Talk to your partner about which expenditures they believe should be considered shared and which should be considered individual expenses.

2. Split expenses evenly. By splitting every expense evenly, you and your partner have a form of equality in the relationship. This is probably the most logical way to split expenses for couples who have equal or roughly equal incomes.

There are many ways to split expenses 50/50. You might choose to split each expense as it comes in. Alternately, you might reconcile receipts at the end of each month and pay your partner whatever is “owed.” Talk to your partner about which method works best for you.

You don’t need to split everything perfectly evenly. Creating a spreadsheet to track expenses, or otherwise accounting for every penny spent between you can reduce your relationship to a purely economic exchange that takes the romance out of it. Even if you split household bills, it’s still okay to treat your significant other to dinner or a date when you go out.

For instance, you might take turns paying for dinner. Even if your dinners don’t total the exact same amount each time you go out to eat, over time, you’ll each probably end paying about the same amount. This qualifies as a form of splitting costs evenly.

3. Split your expenses according to income. This expense-splitting technique calls for the person with the higher income paying for a larger share of the household expenses. In other words, equality is achieved through each person in the relationship paying expenses according to their ability.

For example, suppose you earn $3,000 per month and your partner earns $2,000 each month. In this case, you should pay for 60% of the expenses, since your income is 60% of the total household income (the figure you get when you combine the incomes of you and your partner).

Talk carefully with your partner to make sure that there are no hidden issues before going forward with this method. In some cases, your partner may feel as though they are contributing too much or too little if this method is used.

4. Share expenses unevenly. In this method, one person will pay for the majority of household expenses. This is the natural choice to make when one person in the relationship has way more income than the other person. However, if both you and your partner make a lot of money, either of you could choose to take on an expense-splitting arrangement like this.

A fair arrangement doesn’t necessarily need to divide all expenses perfectly. For instance, one of you could take the internet bill while the other takes the power bill. Divide things up according to whichever scheme suits your situation.

5. Be willing to trade time and money. If you work and your partner doesn’t or if your partner works but you do not, there are other ways you can come to a fair arrangement by thinking about the work (as well as the money) it takes to run a household. Domestic work – cleaning, cooking, and doing the laundry – is crucial to keeping a household going. It makes little sense for one person to both complete all these tasks and also provide financial stability for you as a couple.

Think about splitting the total amount of work that each of you do as a couple rather than thinking of splitting expenses along purely financial lines.



Method 2 Splitting Food Expenses.

1. Figure out your food budget. Your food budget is the total you spend on food over a given period. To get an accurate picture of how much you spend on food, track your expenses over a certain period of time. Tracking over a month is a good unit of time, since depending on how much you and your partner eat, you might not spend much on food.

Use a shared spreadsheet in Google Doc or another program to track your expenditures. Your document should indicate each item you bought and how much it cost.

Alternatively, try a low-tech route like writing your grocery and dining-out expenses on a piece of lined paper.

Keep your receipts while tracking your food budget.

2. Analyze the budget. Once you’ve figured out your food budget, evaluate the information with your partner. Are you spending too much, too little, or just the right amount? Look for areas where you can cut expenses.

For instance, instead of spending so much on junk food and snacks, try to find healthy alternatives like fruit or veggies and hummus.

Instead of eating out so much, try eating at home more often. Make cooking together a couple's activity.

Eliminate or reduce your alcohol consumption for more savings.

3. Decide how to split the food expenditures. You can use an income-based method to choose how to split the food expenses, or split the food expenses according to consumption patterns. Whatever method you choose, ensure you and your partner agree on how much money you should be spending on food, and ensure you both set aside money each month for your grocery budget.

Let go of small differences in food consumption. Even if your partner eats more than you, constantly analyzing how much money each person owes for food can put a strain on the relationship.



Method 3 Being Smart About Shared Finances.

1. Plan for emergencies. Both you and your partner should have money saved in the event that one or both of you needs to pay for surgery, a new vehicle, or another large expense. Try to set aside at least 25% of your monthly income for savings.

You should have at least six months’ worth of income saved to cover periods of potential unemployment.

Be sure to set beneficiaries on your retirement and insurance plans, too.

If you separate from your partner, don’t forget to change your beneficiary list.

2. Have regular financial checkups. Every month or two, you and your partner should have a conversation about where you’re both at financially. Are you still both increasing your savings? Do you have enough saved to cover an emergency? Are you both still comfortable with the way expenses are being shared? Talk to your partner about these and other related issues.

Make budgeting and financial planning an activity you do together. This can be more successful or even exciting if you are both working towards a common goal, such as a vacation or purchasing a home.

Always be honest about your finances. If you are struggling financially, you should admit to your partner that you’re having money problems. That way they can help you out by either loaning you money, helping you find another job, or taking other action that can help.

Encourage your partner to be honest with you about their spending habits and their happiness with your current financial arrangement. If your partner lies about money matters, you should seriously consider ending the relationship.

Don’t let your partner push you into a purchase you can’t really afford. For instance, if you can’t afford a new car but your partner really wants you to have one, stand firm and insist that you will not make such a purchase. If they love you, they will respect your decision.

3. Do not move in with your significant other for financial reasons. Living with someone else and sharing expenses does save money, but if you make the decision to shack up based on the potential economic benefit, your relationship will be on an unstable foundation. Only move in together if you’re truly in love with the person and ready to be in close proximity to them night and day. This will make splitting finances just one part of your relationship, and not its entire basis.

4. Avoid borrowing money. Not only is it annoying for your partner, but it might make them suspicious of your financial health and question your intentions. It’s okay to borrow money in an emergency situation, but don’t make a regular habit of it.

If your partner regularly asks to borrow money, you should inquire as to why they constantly need money. They may have lost their job or have unpaid debts you don’t know about.

5. Avoid sharing debts. Cosigning a loan for your partner is never a good idea. The last thing you want to do is end up saddled with debt that you did not personally incur. Only make a large investment with your partner like a house or car if you are in a stable, long-term relationship.

You should ask your partner about any debts or liabilities that they may hold. Be honest about your own debt as well. Keeping these secret can ruin a relationship when the debt is discovered by the other partner.

Always put both your names on the lease, mortgage, or loan. This will allow you some degree of protection in the event you and your partner separate.

For mortgages, consult a real-estate attorney to help you figure out the best way to negotiate your local real estate laws as they relate to your relationship. A married couple has different options for taking out a home loan than an unmarried couple.

For auto loans, too, you (and your partner) should talk to a financial officer at your local bank or credit union. There are many variables that could impact whether you and your partner decide to take out an individual loan or cosign the loan. Seek advice relevant to your living situation in order to get the lowest interest rates and avoid shared debt.

6. Do not share assets. Assets are valuable possessions or investments. Common assets include bank accounts as well as big-ticket items. Typical material assets include houses, cars, and boats. These items should never be purchased using both your names. Otherwise, you might end up wrangling over ownership in the event you separate.

Bank accounts, likewise, should never be shared between you and your partner. These accounts can be a source of tension should one partner decide to use the money for themselves.

If you want to set up a shared account with your partner – for instance, an account either of you can use to pay bills – keep it completely separate from your personal account. Put a small amount of money in it each month along with your partner, and use it only to pay the bills you intended it for.

February 25, 2020

How to Split Expenses As a Couple.

How to Split Expenses As a Couple.

Splitting expenses as a couple is an important aspect of having a stable relationship, especially if you’re living together. There are several ways to split expenses. One way is to split everything right down the middle, so each person pays half. The other way is for each person to pay for what they can afford. The final way is for one person to pay all or most of the expenses. If one of you works little or not at all, that person should make up the difference by contributing energy toward domestic tasks. Finally, ensure you’re covering yourself by keeping separate bank accounts and not cosigning loans with your partner.



Method 1 Choosing the Right Method.

1. Determine what expenses qualify as shared. Sometimes it is easy to identify a shared expense. For instance, heating, water, and electricity are house-wide expenses and you will both, presumably, enjoy their use in approximately equal amounts. But it might be harder to justify sharing other expenses. If you have TV service at your home, for instance, but only one of you watches TV, it makes little sense to split that particular expense.

Talk to your partner about which expenditures they believe should be considered shared and which should be considered individual expenses.

2. Split expenses evenly. By splitting every expense evenly, you and your partner have a form of equality in the relationship. This is probably the most logical way to split expenses for couples who have equal or roughly equal incomes.

There are many ways to split expenses 50/50. You might choose to split each expense as it comes in. Alternately, you might reconcile receipts at the end of each month and pay your partner whatever is “owed.” Talk to your partner about which method works best for you.

You don’t need to split everything perfectly evenly. Creating a spreadsheet to track expenses, or otherwise accounting for every penny spent between you can reduce your relationship to a purely economic exchange that takes the romance out of it. Even if you split household bills, it’s still okay to treat your significant other to dinner or a date when you go out.

For instance, you might take turns paying for dinner. Even if your dinners don’t total the exact same amount each time you go out to eat, over time, you’ll each probably end paying about the same amount. This qualifies as a form of splitting costs evenly.

3. Split your expenses according to income. This expense-splitting technique calls for the person with the higher income paying for a larger share of the household expenses. In other words, equality is achieved through each person in the relationship paying expenses according to their ability.

For example, suppose you earn $3,000 per month and your partner earns $2,000 each month. In this case, you should pay for 60% of the expenses, since your income is 60% of the total household income (the figure you get when you combine the incomes of you and your partner).

Talk carefully with your partner to make sure that there are no hidden issues before going forward with this method. In some cases, your partner may feel as though they are contributing too much or too little if this method is used.

4. Share expenses unevenly. In this method, one person will pay for the majority of household expenses. This is the natural choice to make when one person in the relationship has way more income than the other person. However, if both you and your partner make a lot of money, either of you could choose to take on an expense-splitting arrangement like this.

A fair arrangement doesn’t necessarily need to divide all expenses perfectly. For instance, one of you could take the internet bill while the other takes the power bill. Divide things up according to whichever scheme suits your situation.

5. Be willing to trade time and money. If you work and your partner doesn’t or if your partner works but you do not, there are other ways you can come to a fair arrangement by thinking about the work (as well as the money) it takes to run a household. Domestic work – cleaning, cooking, and doing the laundry – is crucial to keeping a household going. It makes little sense for one person to both complete all these tasks and also provide financial stability for you as a couple.

Think about splitting the total amount of work that each of you do as a couple rather than thinking of splitting expenses along purely financial lines.



Method 2 Splitting Food Expenses.

1. Figure out your food budget. Your food budget is the total you spend on food over a given period. To get an accurate picture of how much you spend on food, track your expenses over a certain period of time. Tracking over a month is a good unit of time, since depending on how much you and your partner eat, you might not spend much on food.

Use a shared spreadsheet in Google Doc or another program to track your expenditures. Your document should indicate each item you bought and how much it cost.

Alternatively, try a low-tech route like writing your grocery and dining-out expenses on a piece of lined paper.

Keep your receipts while tracking your food budget.

2. Analyze the budget. Once you’ve figured out your food budget, evaluate the information with your partner. Are you spending too much, too little, or just the right amount? Look for areas where you can cut expenses.

For instance, instead of spending so much on junk food and snacks, try to find healthy alternatives like fruit or veggies and hummus.

Instead of eating out so much, try eating at home more often. Make cooking together a couple's activity.

Eliminate or reduce your alcohol consumption for more savings.

3. Decide how to split the food expenditures. You can use an income-based method to choose how to split the food expenses, or split the food expenses according to consumption patterns. Whatever method you choose, ensure you and your partner agree on how much money you should be spending on food, and ensure you both set aside money each month for your grocery budget.

Let go of small differences in food consumption. Even if your partner eats more than you, constantly analyzing how much money each person owes for food can put a strain on the relationship.



Method 3 Being Smart About Shared Finances.

1. Plan for emergencies. Both you and your partner should have money saved in the event that one or both of you needs to pay for surgery, a new vehicle, or another large expense. Try to set aside at least 25% of your monthly income for savings.

You should have at least six months’ worth of income saved to cover periods of potential unemployment.

Be sure to set beneficiaries on your retirement and insurance plans, too.

If you separate from your partner, don’t forget to change your beneficiary list.

2. Have regular financial checkups. Every month or two, you and your partner should have a conversation about where you’re both at financially. Are you still both increasing your savings? Do you have enough saved to cover an emergency? Are you both still comfortable with the way expenses are being shared? Talk to your partner about these and other related issues.

Make budgeting and financial planning an activity you do together. This can be more successful or even exciting if you are both working towards a common goal, such as a vacation or purchasing a home.

Always be honest about your finances. If you are struggling financially, you should admit to your partner that you’re having money problems. That way they can help you out by either loaning you money, helping you find another job, or taking other action that can help.

Encourage your partner to be honest with you about their spending habits and their happiness with your current financial arrangement. If your partner lies about money matters, you should seriously consider ending the relationship.

Don’t let your partner push you into a purchase you can’t really afford. For instance, if you can’t afford a new car but your partner really wants you to have one, stand firm and insist that you will not make such a purchase. If they love you, they will respect your decision.

3. Do not move in with your significant other for financial reasons. Living with someone else and sharing expenses does save money, but if you make the decision to shack up based on the potential economic benefit, your relationship will be on an unstable foundation. Only move in together if you’re truly in love with the person and ready to be in close proximity to them night and day. This will make splitting finances just one part of your relationship, and not its entire basis.

4. Avoid borrowing money. Not only is it annoying for your partner, but it might make them suspicious of your financial health and question your intentions. It’s okay to borrow money in an emergency situation, but don’t make a regular habit of it.

If your partner regularly asks to borrow money, you should inquire as to why they constantly need money. They may have lost their job or have unpaid debts you don’t know about.

5. Avoid sharing debts. Cosigning a loan for your partner is never a good idea. The last thing you want to do is end up saddled with debt that you did not personally incur. Only make a large investment with your partner like a house or car if you are in a stable, long-term relationship.

You should ask your partner about any debts or liabilities that they may hold. Be honest about your own debt as well. Keeping these secret can ruin a relationship when the debt is discovered by the other partner.

Always put both your names on the lease, mortgage, or loan. This will allow you some degree of protection in the event you and your partner separate.

For mortgages, consult a real-estate attorney to help you figure out the best way to negotiate your local real estate laws as they relate to your relationship. A married couple has different options for taking out a home loan than an unmarried couple.

For auto loans, too, you (and your partner) should talk to a financial officer at your local bank or credit union. There are many variables that could impact whether you and your partner decide to take out an individual loan or cosign the loan. Seek advice relevant to your living situation in order to get the lowest interest rates and avoid shared debt.

6. Do not share assets. Assets are valuable possessions or investments. Common assets include bank accounts as well as big-ticket items. Typical material assets include houses, cars, and boats. These items should never be purchased using both your names. Otherwise, you might end up wrangling over ownership in the event you separate.

Bank accounts, likewise, should never be shared between you and your partner. These accounts can be a source of tension should one partner decide to use the money for themselves.

If you want to set up a shared account with your partner – for instance, an account either of you can use to pay bills – keep it completely separate from your personal account. Put a small amount of money in it each month along with your partner, and use it only to pay the bills you intended it for.

February 25, 2020