Time Value of Money

Which is worth more, a dollar today or a dollar tomorrow? Or, put another way, is it better to have a dollar today or a dollar tomorrow?

As consumers, we have a natural desire to have money right now. We have a disposition to value having money today over having money tomorrow. But there are actually other reasons why a dollar today is worth more than one tomorrow.

Having a dollar right now gives me options about what to do with that dollar. I can spend it, yes, but I can also invest it. If I invested it, that dollar would be worth more in the future, as my investment grows. So at a 5% interest rate, if I had $100 now, it would be the same as if I had $105 in a year. In that example, $100 now = $105 later.

Of course, interest rates aren't the only thing that affects the value of money. While interest is making your money grow, inflation is eating away at the true value of that money. This is why investing in low-paying investment won't really earn you anything in the long run. The purchasing power of your money will not grow.

Right now, bank CDs are paying very low interest rates. Well below the rate of inflation. Putting money into a CD will actually cause your purchasing power to decrease. So when considering investments, do not only look at the rate, but consider the future value of your money and how your decisions today affect your overall purchasing power.

Things to think about (2)

1.   Thomas Franklin arrived at the following tax information:

Gross salary, $46,660

Interest earnings, $225

Dividend income, $80

One personal exemption, $3,400

Itemized deductions, $7,820

Adjustments to income, $1,150

What amount would Thomas report as taxable income?

34,595

2.   What would be the net annual cost of the following checking account? 

Monthly fee, $3.75; processing fee, 25 cents per check; checks written, an average of 22 a month.

$111

     

     

3.   What would be the average tax rate for a person who paid taxes of $4,864.14 on a taxable income of $39,870?

12.2%

4.   A payday loan company charges 4 percent interest for a two-week period.  What would be the annual interest rate from that company?

104%

           

5.   What is the annual opportunity cost of a checking account that requires a $350 minimum balance to avoid service charges? Assume an interest rate of 6.5 percent.

$372.75

Things to think about (1)

1.      Ben Collins plans to buy a house for $65,000. If that real estate property is expected to increase in value 5 percent each year, what would its approximate value be seven years from now?

91455

2.      At an annual interest rate of five percent, how long would it take for your savings to double?

14.4 years

3.      In the mid-1990s, selected automobiles had an average cost of $12,000. The average cost of those same motor vehicles is now $20,000. What was the rate of increase for this item between the two time periods?

60%

4.      A family spends $28,000 a year for living expenses. If prices increase by 4 percent a year for the next three years, what amount will the family need for its living expenses?

31496.20

5.      What would be the yearly earnings for a person with $6,000 in savings at an annual interest rate of 5.5 percent?

$330

6.      Elaine Romberg prepares her own income tax return each year. A tax preparer would charge her $60 for this service. Over a period of 10 years, how much does Elaine gain from preparing her own tax return?  Assumes she can earn 3 percent on her savings.

687.83

7.   Tran Lee plans to set aside $1,800 a year for the next six years, earning 4 percent.  What would be the future value of this savings amount?

       11939.36

8.   If you borrow $8,000 with a 5 percent interest rate to be repaid in five equal payments at the end of the next five years, what would be the amount of each payment?

            1848

9.   Based on the following data, compute the total assets, total liabilities, and net worth.

Liquid assets, $3,670                               Household assets, $89,890

Investment assets, $8,340                        Long-term liabilities, $76,230

Current liabilities, $2,670

Assets: 101900

Liabilities: 78900

Net worth: 23000

10. Which of the following employee benefits has the greater value?  (Assume a 28 percent tax rate.)

A nontaxable pension contribution of $4,300 or the use of a company car with a taxable value of $6,325. 

The nontaxable pension has an after tax value of 5972.23 (4300/(1-.28)). Since this is less than the 6325 value of the car, the car has the greater value.

Credit Unions and Banks: What's the Difference?

Savings banks and credit unions serve many of the same purposes, but they have important differences.

They have distinct ownership-- A credit union is owned by its members, the account holders. Where a bank is a corporation and owned by shareholders.

Membership-- credit unions restrict who can be a member, using such criteria as being employed by a particular employer or industry, or living within a certain state. Banks don't have such restrictions.

Rates-- Generally, because a credit union does not have to profit shareholders, they pay better rates on deposits and offer better terms on loans than banks do.

Safety-- Credit Unions are not FDIC insured. They have their own form of insurance, provided by NCUSIF. Banks, of course, are FDIC insured.

What is Fiat Money, and What happened to the Gold Standard?

The Fiat system means that the value of money is determined by the power backing the money. The money itself has no value except that the government says so. Our dollar bills are just worthless pieces of linen paper without the government backing and guarantee.

Under the gold standard, the dollar was worth something in and of itself because it was easily exchanged for gold. The US decided to leave the gold standard after Briton did. There were runs on the bank and people were worried about the USD and converting it for gold. FDR realized that in order to save the banking system it might be necessary to abandon the gold standard. His advisers all disagreed, except for one. Taking the advise of that one adviser, the end of the gold standard was embraced here in the US.

Economists now hold it as fact that one of the reasons we came out of the Great Depression was because of that move away from the gold standard. Not being on the gold standard gave the government power to change interest rates and to control the flow of money into and out of the economy.

Always Use Protection

Financial Fitness 2015 tip number 2:



 Always use protection. 

Identity theft is a fast growing crime and is particularly common around and after the holidays. One of the things that makes identity theft such a major problem is that often people don't realize that their information has been compromised until well after the fact. In some cases, it can take years to discover that something is wrong. 

Don't let this happen to you. Check your credit annually at  annualcreditreport.com and sign up for identity theft protection from your financial institution. Do it now, before it is too late. 

Identity theft protection might cost you a little bit monthly at the bank (my customers pay 12.99 a month) but the fee is well worth it. Included is a copy of the credit reports, credit monitoring, and assistance in fixing your credit report. With as many things that your credit report effects, you can't afford to be without protection.

52 Week Challenge

It's a new year! Welcome to 2015!

If you are ready to get serious about your financial life, come take a journey with me this year. Let's work on getting back to the basics; making money management easy, convenient, and effective.

With the new year, people across the world are resolving to better their lives in some way or other. Many are making unrealistic resolutions that they will keep for a week or two. I am about to propose a resolution that you can and should make.

I want you to save $1378 extra this year.

And we are going to do it together. Here's how.

First, open a new savings account. I personally use American Express for this for a couple of great reasons. First, the interest rate is about as high as you can find out there right now. At the time of this writing, the rate is 0.85% APY, 85 times what I am making at my local bank. Second, keeping this money away from my local bank makes it harder for me to raid the account when I think I need it. That severely cuts down on the temptation.

After you have an account set up, start scheduling transfers. Every week, on Friday, transfer an amount equal to the week into your new savings account. For example, this Friday, the first of 2015, transfer a single dollar. Next Friday, the 9th, is the second week of 2015, so transfer 2 dollars. and so forth until the end of the year when on the last Friday you are transferring 52 dollars.

At first, this is going to seem easy. And it is. In January you will have put in only $15. But you may be thinking of December. How are you going to swing over $50ish a week? Especially when there is Christmas shopping to do?!

Well, we are going to work this year to put ourselves on a stronger financial footing. As the weeks pass, our situation will, hopefully, improve. And by the end of the year, the habit will have become so normal that you will have learned to live within your means.

So give it a shot. Let's start saving and taking care of our financial futures.