Continuing with the “Millionaire” theme, today we’re going to look at Millionaire Math.
Most folks will attend K-12 and then maybe some college after that. In that time period folks will probably get a good 12-16 years worth of math. Then, once they get out in the real world, many boot all the math they’ve learned out the door and start fumbling around with their money.
Sometimes it’s lack of knowledge, other times it’s naïveté, and it can also be egotistical thinking that the rules of math do not apply to everyone. Often it may well be we don’t learn real-world math in school. I’ve never once used sine, cosine, or tangent in my day to day decision making, but I have had to determine the future value of money in order to make a responsible personal finance decision.
The Real World
Whatever the reason, here are some common real life scenarios that could prove to be stumbling blocks in the realm of math for person finance. If you don’t know how to do the math, how can you make wise choices with your money? Do you know where to look for help to find the solutions? How can you be certain you are winning with math?
Feel free to share your answers! Subscribe to my blog using the link below and I will share my answers in my post next week.
Here we go…
Let’s start simple, just for a warm up. You have a savings account paying 1% annual interest and you put a $1,000 into the account. How much money would be in the account after 2 years if the money and the interest remained constant?
Here’s another easy one. I like cheese. I like really good and expensive cheese. Stored properly, cheese will safely last 3 months. Let’s say my family eats a pound per week. One day we go into the grocery store and I notice cheese on sale at 50% off – the cheapest I’ve ever seen it. What a deal! How much cheese should I buy?
Is a $60/year Costco membership worth the money for the gas alone? You’ll save 20 cents per gallon, your car gets 30mpg, and you drive 10,000 miles per year.
Leasing a car is about as poor of a financial decision as you can make, but what about leasing equipment for your business? Let’s say you want to open a technology-based company which means you’ll be buying a lot of computers and buying them often. You’ll always need the most current model to do your job well. You have a choice to lease $30,000 worth of computers for 3 years at $750/month or you can plunk down the $30,000 today and just bank on trading them in when you need new ones 3 years from now. Is this a good deal?
Your student loan is at 7% interest. It seems everyone is making money in the stock market these days, so you decide to make minimum payments on your loan in exchange for investing some of your extra money in the market. You reason you can take your gains and use them to pay the loan later. In addition, you hate to miss out on a hot stock market when all your friends are bragging about how well their investments are doing. With your loan at 7%, the risk-free rate at 1.5% (T-bills) and the stock market’s Implied Rate of Return currently at 8.1% (S&P500) is investing in the stock market wise? Or should you forgo investing in stocks and pay off the loan?
You have 2 credit cards, Card A carries a $5,600 balance and Card B carries a $7,200 balance. Card A is at 12.5% interest rate and Card B is at 14.6% interest rate. You’re currently only making minimum payments, but you can qualify for a home equity loan with less than 6% interest and get the $12,800 to pay off your credit cards. Closing costs on the home equity loan will run $300. Should you do this deal?
You decide to become a landlord and invest in rental property. You buy a house for $250,000 that you can rent for $1,750/month. You’ll pay a property manager $900/year to manage your tenants, spend $1,500/year in maintenance & lawn care, $1,400/year in taxes, and $1,200/year in insurance. With a positive cashflow of $16,000/year this sounds pretty good – you’re on your way to becoming a real estate king! Is this a good rental property?
Conversely you take a new job in a new city. The houses in the neighborhood where you want to live run $550,000. You have a considerable amount of cash in the bank from the sale of your previous home. This means you can afford a very large down payment but you also notice you can rent for $2,400/month in the same neighborhood. Looking long term should you go ahead and buy a home, or should you rent a home and invest your money in the stock market instead?
You need a new HVAC unit that is going to cost $8,295. Your contractor will knock $150 off the bill if you pay with cash, which you have readily available. However, you’d like to use your Southwest Visa to earn the mileage points. What is the better deal?
You have the opportunity to invest in a business. The owner is asking for $5,000 and he will pay you back $6,000 over the next 3 years ($1,000 in year one + $2,000 in year two + $3,000 in year 3). Is this a worthwhile investment?
You’re 35 years old and have no savings for retirement yet. You decide to get serious since you want to retire at 70 and live on something more than social security income. Currently your budget is $5,000/month. How much should you start saving in order to maintain a similar level of income while resting comfortably on the beach in Del Boca Vista in 35 years?
You’ve inherited $100,000 from dear aunt Sue. You’d like to invest it in something with guaranteed returns, so CDs earning 3% sound good. How long will it take for your inheritance to double in value?
Alright – let’s see how we do. Some answers may be a bit subjective in how the math works in your given situation. Others are no-brainers. The scenarios are designed to make you you do the math and challenge your assumptions. The links above DO NOT equal endorsements, but they may help you find the answers… I’ll be back next Monday with my answers and we can compare.
As always, cheers – and thanks for reading!