Time Value of Money

You must have heard “Time is Money”, but do you know what is Time Value of Money? No… then blame the economists. I guess economists love to twist the common sense language into incomprehensible mumbo-jumbo to confuse the common junta.

(Picture courtesy Sam Fox)  Okay, here is another way to look at the this terminology: If you are offered 10,000 INR today or after one year, what will be your pick? Easy, huh. Only a nut-head would choose the later. But why? Well because money “NOW’ can be invested to earn more money later, or it can be utilized right now for any material gratification or who knows what will happen one year later!! What-ever the reason, everyone attaches some “time value” to the money.

                                                        

 

There are basically two reasons why people attach time value to money :

• Possibility of growing the money over a period of time
• Possibility of purchasing less in the same money over a period of time 

This simple concept becomes extremely complicated when we start applying this to practical situations. Here are some examples, where this concept is utilized:

1) How much is the present value of 100Rs paid after a year?

2) What is the monthly payment of a mortgage of Rs 200,000 at annual rate of 6% for 10 years?

3) If the investment scheme promises 10% annual interest, in how many years my present money of Rs 100 will get doubled?

4) In a different way,how much rate of interest should a scheme have if I need to double my money of Rs 100 in 5 years?

5) If I invest Rs 1000 for 20 years at 7% rate of interest, what is the final future value discounted back to its value today?

6) You are planning to retire in twenty years. You'll live ten years after retirement. You want to be able to draw out of your savings at the rate of Rs10,000 per year. How much would you have to pay in equal annual deposits until retirement to meet your objectives? Assume interest remains at 9%.

7) If you get payments of Rs 15,000 per year for the next ten years and interest is 8%, how much would that stream of income be worth in present value terms?

8) How much would you pay for an investment which will be worth Rs 60,000 in three years? Assume interest is 5%.

9) You are considering the purchase of two different insurance annuities. Annuity A will pay you Rs16,000 at the beginning of each year for 8 years. Annuity B will pay you Rs12,000 at the end of each year for 12 years. Assuming your money is worth 7%, and each costs you Rs75,000 today, which would you prefer?

10) You deposit Rs17,000 each year for 10 years at 7%. Then you earn 9% after that. If you leave the money invested for another 5 years how much will you have in the 15th year?

All these and many more questions can be answered correctly if you understand the concept of time value of money. If you are mathematically inclined, visit the wiki page or check out this video.

Mutual Fund Tracking

Chandoo created this excellent Mutual Fund excel sheet that act as a simple Mutual Fund tracker. The USP of the excel sheet is that it fetches the MF NAVs from the website and uses that to track your funds. The problem with the excel sheet is that if you have subscribed to MF Systematic Investment Plan (SIP) then it is difficult to use the mutual fund excel sheet. So I modified the excel sheet to add your SIP investment tracking too. Here is the modified excel sheet. Here is a screenshot :

             

Here are the steps to use the excel sheet:

• Select the name of MF from the drop down list
• Enter the start date of MF SIP
• Enter the starting units (as of held today)
• Enter the amount per month

This will immediately give you the results for your portfolio. (Make sure to refresh the NAV sheet for latest NAVs).

You just need to open the excel sheet everyday. It will compare the today’s date with the MF SIP start date. If the date matches, it will automatically update the Units field (by using the today’s NAV and amount per month).

Saving Money from 10 Free Softwares

I recently bought a black HP Pavillion desktop for around 30K INR. It came with a “Starter edition” of Microsoft Vista, and lot of pre-installed HP Junk. It is natural being a techie to start surfing for free software for replacing some of the junk that come with Windows and to save money from buying those expensive softwares. Here is a list of softwares that I daily use, some to increase my productivity, some to replace pre-installed softwares and some to save money instead of buying those expensive softwares :

1) K-Meleon Browser : No doubt Internet Explorer is junk and can be harmful in terms of unauthorized scripts or pop ups. So most people recommend Firefox. I love it, but with FF3, is extremely bloated and eats up huge amount of my RAM. I tries Opera and Safari but didn’t like anything. Then I found K-Meleon, which is based on Gecko layout engine. It comes with few useful extensions too. It is fast and have some unique features too. A simple example is switching proxies with one-click. I use different proxies for my home and office, and using K-Meleon, I can switch between them in just one click. Very useful for me. 

2) CClearner : A pretty neat system optimization software. It removes unused files from your system - allowing Windows to run faster and freeing up valuable hard disk space. I have used it without any side effects and it helps me keep Windows stable.

3) Launchy : Launchy is a free windows utility designed to help you forget about your start menu, the icons on your desktop, and even your file manager. A very handy tool, just press Alt-Space and it pops up, type whatever application you want to open say “word” or “vim”, it even shows various options. No need to go through “Start –> Programs” etc. Very productive and time saving and best mouse-free.

4) GNU Image Manipulation : GIMP is a free image manipulation software. It is extremely rich in features and can be very handy for amateurs as well as professionals for imagine retouching or any manipulations of image. It can be used for fun as well as for business purposes. Lot of people feel that it is very clumsy to use, but once you get hang of it, you will love it. You can do extreme makeover using GIMP, as the following example illustrates :

It surely is a replacement for Adobe Photoshop.

5) VLC Media Player : It can replace the default Media Player on Windows and is very versatile. It can almost play everything. It can play various audio and video formats (MPEG-1, MPEG-2, MPEG-4, DivX, mp3, ogg) as well as DVDs, VCDs, and various streaming protocols.

6) Outlook Attachment Remover : If you are stuck with Outlook as I am (although ThunderBird is considered as it’s replacement, for me it botches some of my emails), this free outlook attachment remover is extremely handy, especially if you get lot of attachments in your emails. This became very helpful for my office system too, since it extracts emails from outlook and keeps it in a pre-specified folder and still keeps the link intact in the email. Very very handy.

7) AVG Antivirus : Instead of spending money for Norton/Symantec Antivirus, the same kind of protection can be obtained by installing the free anti-virus software AVG. It provides a really good protection and doen’t consume huge amount of your resources. With Norton, I always had problems that the system runs slower. AVG is super cool and it keeps updating the virus definitions.

8) Office : The worst part of Windows, is that it comes with lot of unnecessary pre-installed products like IE, but it does not come pre-installed with Microsoft Office. You need to pay extra money to get the Office installed. This is where OpenOffice comes into picture. It is as close replacement to MS Office as it can be.

9) PDF Creator : It is a very handy tool, if you frequently write documents and want to share it with everyone. PDF obviously looks better than word documents. Just install the PDF creator and “print” any document to convert it to PDF. Simple!!

10) GNU Cash : If you want to have a software for managing your personal finance or a small business, then don’t go spending those $$ for buying any software. GNU Cash is extremely good and it is free. It uses a double-entry system, which might be confusing at first, but the tutorials are very nice. It will take you just few minutes to install and start going. It will take some time to look into specific features your need, but almost all that is needed is present. I will be doing a full review of the product later in some other post.

Financial Game - Creditability

For my earlier post, I received a comment from RaagvamDutt, telling me about reverse mortgage. I am aware of reverse mortgage and know that it can be handy for old couple with constraint income. It does not contradict my conclusions of the earlier post, rather it compliments it.

• Buy a house at old age, for living in it, and if you income is not sufficient, put the house on reverse mortgage, to earn that extra income and still live in it.

I just downloaded a new financial game called Creditability. It looks to me a pretty interesting game. Here is what the website claims :

Creditability is set in four different environments: university, a shopping precinct, TV studios and a village. The purpose of the game is to successfully complete the various tasks and challenges within each environment, building up knowledge of money, credit and debt.

Here are some screenshots :

                                  

Loan Calculator

If you have taken a loan and have been paying EMIs, then at some point, you definitely must have wondered about how much loan amount you have paid back (including principal amount and interest). Also sometimes we might want to know what is the percentage of principal and interest a particular EMI is paying back. This information is needed either just out of curiosity or sometimes for tax calculations. It is always difficult to get this information from banks (how much friendly the bank is) on a periodic basis.

I was in the similar situation regarding my education loan (from UBI) and wondering how can I quickly find it out myself. I just found an excel sheet on the internet (don't remember the original source, if you know please let me know), which can be quickly used to find the entire loan tenure EMIs. It is an extremely handy tool. You can download the excel sheet from here.

You just need to enter the "Loan Amount", "Interest Rate", "Loan Period" and "Starting Date"

EMI calculation using Excel

I mentioned the formula used to calculate an EMI, but putting values in the formula and calculating it is a cumbersome task. So I did some research in Microsoft Excel and found out that it can done quite easily in excel.

EMI calculation in Excel

Step 1: Open the excel sheet and locate the fx button

Step 2: In the pop-up menu, click on Financial Catergory

Step 3: In the Function Name click 'PMT'

Step 4: A box will appear as shown, fill in the values mentioned and voila you get the EMI.

Interest Component of the EMI

• Just choose the IPMT function instead of PMT

Prinicpal Component of EMI

• Just choose the PPMT function instead of PMT

Excel Based Mutual Fund Portfolio Tracker

Here is an excellent tool from Purna Chandra. He explains how to create an excel sheet based mutual fund portfolio tracker. He has generously allowed the excel sheet to be downloaded. Just remember that everytime you open the workbook, go to "NAVs" sheet and refresh the data. [Select anywhere in the table, right click and say Refresh Data].