How Checking Accounts Work

Wait—doesn’t everyone know how a checking account works? Make deposits, write checks, and hope that you don’t have an overdraft. Yes, that’s certainly true, but there are more details you should know about.

Types of Checking Accounts

The most basic kind of checking account is sometimes called a fee account because you pay fees for the services the bank provides. There is usually a monthly fee as well as a per-check fee, but there are no minimum balance requirements.

Banks also offer a variety of fee-free accounts. In most cases this kind of account requires that you always keep a certain minimum balance—perhaps $800—in the account. As long as you maintain this minimum balance, there are no monthly or per-check fees. If, however, the balance dips below the minimum, even if just for a day and for one dollar, you are hit with the regular monthly service fee.

How can banks offer a fee-free checking account? The answer lies in the minimum balance. This is money they, in effect, have on permanent deposit and is part of the capital they have available to lend out to other customers. In other words, they earn interest on the money in your account and this lets them offer the account without fees. Also, by offering fee-free accounts, they attract customers who will probably use (and pay for) other bank services, such as loans and safety deposit boxes.

Many checking accounts are touted as paying interest. Hey, sounds great—earn interest on your money while it sits in the account! But take a look at the rates being paid. The last time I did, I was receiving a paltry 0.1%—that’s right, one-tenth of a percent—on my checking account. If my average balance for the year is, say, $1,000, I will earn—drum roll, please—exactly one dollar in interest for the year. Sure, every dollar counts, but the point is that the interest on your checking account is not going to make any real difference one way or the other. In addition, with rates far below inflation (even though inflation is historically low now), you are in theory losing money while it sits idle in your account.

]]> http://www.excel4urbusiness.com/being-smart-with-your-checking-accounts/feed/ http://www.excel4urbusiness.com/balancing-your-budget-in-excel/ http://www.excel4urbusiness.com/balancing-your-budget-in-excel/#comments Thu, 10 Apr 2008 05:23:39 +0000 admin http://www.excel4urbusiness.com/balancing-your-budget-in-excel/ Believe me, it’s a rare event for someone to analyze her expenses and find she is spending less than she should be! Like 99% of people, you are likely to be faced with the prospect of balancing your budget by adjusting things so expenses are equal to, or preferably less than, income.

Some ways of reducing expenses, such as reducing or avoiding credit card and bank fees, are covered in later chapters. In this section I present a few additional tips and suggestions for successfully balancing your budget by reducing expenses.

Increase Your Income Wouldn’t the easiest way to balance your budget be to bring in more money? Sure, that sounds great—but actually doing so is not that easy. You could ask for a raise or hope for a promotion, and good luck to you, but don’t count on it. How about a new, better paying job? That’s a great idea if you can manage it, but few people can. A second part-time job might be a temporary expedient to help pay down some debts, but it’s not something many people want to do for the long term. The unavoidable fact is that budgets are almost always balanced by cutting expenses.

Watch Impulse Buying

The shops and catalogs are filled with great products of all kinds, and it’s easy to just pull out your credit card or checkbook to buy that latest new item that caught your fancy. Danger!! It’s just this kind of impulse buying that gets a lot of people in trouble. When the urge hits you, think.

First think, “Do I really need this?” In most cases the answer is definitely no—your life will go on just fine without it.

But of course life is not just about needs. Buying things for pleasure and enjoyment is perfectly valid, too. Then you need to think about how much enjoyment you will really get from the item you are considering. When you really think about it, a lot of our purchases do not bring that much lasting pleasure to our lives. Will this $50 item just bring you a short-lived distraction and then be forgotten? Or will it really enhance your life and make a difference over the months and years? Perhaps the item might be less expensive if you wait, as is the case with most electronic equipment?

You also need to recognize and resist the psychological justifications many people use for purchases. Perhaps most common is the “I deserve this” approach. Perhaps you do, but that’s hardly justification for buying something you cannot really afford! I figure that I deserve a new red Ferrari, but I still don’t have one! What you really deserve is financial comfort and security and making unnecessary purchases for psychological reasons is not the way to get it!

Look for Sales

Some people love looking for sales, others hate it. Either way, there’s no doubt that sales can be a great way to trim your expenses. It takes some patience because you might need to wait for a sale rather than buying something right away.

Here’s a good example. I recently needed some clothes and instead of rushing right out to the department store, I kept my eyes peeled for a sale. A few weeks later I found just what I was looking for at an outlet store. For less than $150 I got pants and shirts that would have cost at least $700 at regular prices.

Of course, not all sales let you save so big, but they’re still worth looking for. Food, clothes, electronics, books—most everything you shop for is on sale at one time or another. For nonperishable staples, such as soap, canned food, and napkins, buying in bulk from a warehouse store can produce big savings (but make sure that any membership fees do not cancel those savings!).

Learn to Cook

There sure is something nice about going to a restaurant. A nice selection of food, no cooking, no cleanup—no wonder Americans eat out so often! But let’s face it, restaurants are expensive. Even the moderately priced places will add up if you eat there regularly. Let’s run some numbers for John Doe’s restaurant bill:

• Lunch at work twice per week @ $8.00 = $64.00 per month

• Dinner out three times per week @ $15.00 = $180.00 per month

• Pizza delivery once per week @ $12.00 = $48.00 per month

That’s $292.00 per month or over $3,500 per year. Yikes, sure seems like a place you could cut back.

Of course, eating at restaurants is sometimes about more than just eating. It might be a chance to socialize with your colleagues at work or to relax with friends at the end of a busy week. Think about your restaurant habits and decide which restaurant visits are important for work or social reasons and which are for convenience only. Then you can start cutting back.

But wait, you still have to eat. Yep, and that means fixing more meals yourself, including “brown bag” lunches. Basic cooking is not at all difficult and there are plenty of sources of information, including your family, friends, books, and classes. A modest investment in kitchen equipment can lead to big savings.

A budget is a very important part of taking control of your finances. With that under your belt, we can move on to a financial tool that almost everyone uses—and some people misuse—your checking account.

]]> http://www.excel4urbusiness.com/balancing-your-budget-in-excel/feed/ http://www.excel4urbusiness.com/living-with-a-budget-in-excel/ http://www.excel4urbusiness.com/living-with-a-budget-in-excel/#comments Wed, 09 Apr 2008 06:01:15 +0000 admin http://www.excel4urbusiness.com/living-with-a-budget-in-excel/ Once you have decided that a budget is something you want to do and you have learned how to use the Home Budget template, then what? I won’t kid you, living on a budget is not the easiest thing to do. The potential benefits are huge, however, so it’s really worth your best shot. Let’s take a look at how the budget can help you and some of the difficulties people experience.

Analyze Your Spending

People usually have a pretty good idea of where their money comes from. It’s the spending that’s the big mystery! This is perhaps the most important area where a budget can help—enabling you to figure out exactly where your money is going.

Of course, you need some data before you can analyze your spending patterns. In most cases, there is no choice but to keep the budget for two or three months and then look at the information you collected. If you have been careful about keeping receipts, it might be possible to enter your spending information from the past few months, but few people are so organized! So you might have to start fresh on the first of next month.

One place many people find it easiest to start is to list the first month’s income and expenses. That can be your starting-point budget. Most expenses and income are similar each month for most categories. The second month, make adjustments as necessary. By the third month, you should have a budget that will work well for the following month.

The Jar System It can be a bother to keep track of all your receipts, but you’ll need them for entering expenses into the budget calculator. This is particularly true when a single payment, such as a check you wrote at Wal-Mart or Target, includes expenses in more than one category. Here’s where the jar system comes in handy. Put a large jar in a handy place and put all your receipts in it. Then at the end of the month (or whenever) when you are working on the budget, you’ll have them together in one place. Another idea is to keep a small pad and pen with you at all times to record small expenses as they occur. Or you can use your PDA for this if you have one. Remember, you have to capture your cash transactions as well as checks and charges!

Once you have a few months’ data, how does it look? How do the actual expenses in each category fit with your general perception of how you are—and should be—spending your hard-earned money? Are there categories where the expenditures are a lot more than you expected? These might be areas to cut back. Some expenses, such as rent and car payments, are fixed and cannot easily be reduced. Other categories are discretionary, such as entertainment and clothing, and deserve close examination.

Pay Yourself! Financial advisors generally agree that a budget should always include a savings category—in other words, a pay yourself category. No matter how small the amount, a saving category is a good idea because of the many benefits of building up some financial reserves. Furthermore, it is a lot easier to stick to a budget if you know you are putting something away for the future.

Live Within Your Means

Perhaps the most important question is how your expenses compare with your income. In other words, are you spending more or less than you earn? If you are spending more than you earn, you might already be aware of it from the mounting credit card bills. This is perhaps the most serious sign of financial trouble and calls for immediate action on your part. You will never be able to take control of your finances if there’s more going out than coming in.

This is perhaps the most important reason why a budget is such a valuable tool. Only after you know what your budget is can you hope to stay within its boundaries. A budget is not an end in itself, but rather is a tool to help you achieve your goal of taking charge of your finances.

Live Beneath Your Means The phrase “live beneath your means” sums up what is perhaps the best financial philosophy. In today’s consumer-oriented society, it is not always easy to do, but it’s the best—perhaps the only—route to taking control of your finances for most of us. If you spend less than you earn, you have money to save, and it’s savings that are at the basis of eventually achieving financial independence.

]]> http://www.excel4urbusiness.com/living-with-a-budget-in-excel/feed/ http://www.excel4urbusiness.com/managing-your-money-with-a-budget-in-excel/ http://www.excel4urbusiness.com/managing-your-money-with-a-budget-in-excel/#comments Tue, 08 Apr 2008 05:16:36 +0000 admin http://www.excel4urbusiness.com/managing-your-money-with-a-budget/ A budget is one of the most important tools available to you for taking control of your finances. In this chapter you’ll learn what a budget is and why it can be so useful. You’ll also learn how to use the budget template to manage your own money.

What Is a Budget?

Some people say, “I’m on a budget,” and mean nothing more than that they are limiting their expenditures. “I can’t go to dinner at Chez Pierre’s tonight because I’m on a budget.” In that sense, pretty much everyone is on a budget—after all, how many of us can spend money without limitations?

In another sense, a budget is a way to keep precise track of your money, how much comes in and how much goes out, and to determine how much you can and cannot spend on various things. Money that comes in is divided among the various budget categories, such as mortgage or rent, groceries, and entertainment. Each expense is likewise charged against the corresponding category. There are two main advantages to a budget.

One advantage is that after a few months you will have a pretty good idea of where your money is going. Most of us know how much we spend on things such as rent and car payment, but when it comes to less defined expenses, such as clothing and dining out, we are often in the dark—or worse, under a serious misconception. A friend of mine, for example, was flabbergasted when he started a budget and soon learned he was spending almost $300 per month on restaurant meals and take-out food. That was more than twice what he thought he was spending and he soon took corrective measures. He learned some basic cooking skills and now eats at home much more often. The end result is that he now has an extra $150–$200 per month he can put toward more important things, such as saving for a vacation.

Another advantage of a budget is that it takes the guesswork out of some purchase decisions. Without a budget, the question, “Can I afford it?,” is often answered based on guesswork and wishful thinking. With a budget, you’ll know right away. For instance, suppose your sofa is getting rather threadbare and you see a really nice one on sale. A quick look at your budget balance will tell if you have the required amount in your household account. If so, you know that you can go ahead and buy it without any worries. If not, you know you’ll have to wait.

You should not think that a budget is a straightjacket that leaves you with no options or flexibility. We all know that unexpected expenses come up and can’t be avoided, such as car repairs or a dentist’s bill. Or perhaps there’s a sale that’s just too good to pass up. You should expect your budget to change over time as your income and expenses vary. I’ll show you how a budget can be flexible enough to let you deal with such unexpected events.

Budget Fundamentals

The basis of a budget is a set of categories for your expenses, such as entertainment, insurance, and groceries, and your income, such as salary and interest. When money comes in, such as your paycheck, it is divided up among the various categories. Likewise, each and every expense is charged against the appropriate category. Sounds like a lot of work—and it can be. This is why the Excel template that is part of this chapter is such a valuable tool. By taking most of the drudgery out of keeping a budget, the template lets you have the advantages of budgeting without the hassle—or with a lot less hassle, at any rate!

Let’s take a look at the Home Budget Calculator. Then I’ll explain some ways you can use it to help take control of your finances.

 

]]> http://www.excel4urbusiness.com/managing-your-money-with-a-budget-in-excel/feed/ http://www.excel4urbusiness.com/tracking-your-net-worth-in-excel/ http://www.excel4urbusiness.com/tracking-your-net-worth-in-excel/#comments Mon, 07 Apr 2008 19:56:39 +0000 admin http://www.excel4urbusiness.com/tracking-your-net-worth-in-excel/ Net worth is one of those phrases that you hear now and then, but what does it mean? Simply put, it is the sum of all your assets (things you own) minus the sum of all your liabilities (things you owe). Take what you own and subtract what you owe to get your net worth.

Net worth is a way to track your financial progress or to get a snapshot of your financial status at a given time. In a way, net worth can be thought of as a measure of your financial health. The greater your net worth, the greater your ability to achieve major financial goals and to withstand unexpected financial stresses, such as being laid off or having a serious illness.

I should emphasize, however, that net worth is not a contest. The point is not to have a higher net worth than your friends and co-workers, but rather to use net worth as a tool to evaluate your own financial situation and progress. There are no net worth yardsticks to measure yourself against.

For one thing, net worth naturally changes with age. For most people, it will increase throughout life up to the time of retirement. If, for example, you have recently graduated from college, it is very possible that your net worth will be less than zero because you owe college loans and own basically nothing, and that’s perfectly okay. If you are 50 years old and have a negative net worth, however, it’s a good sign of problems.

Another factor is the kind of life you have chosen to live. Some occupations are higher paying than others, and perhaps you have chosen a lower paying career based on non-financial rewards. There’s no reason, for instance, that a public school teacher should expect to have the same net worth as a heart surgeon at the same age.

Assets to Include

Some assets are clearly appropriate for inclusion in your net worth calculation. These are

• Your bank and investment accounts
• Your retirement accounts
• If you own your home, the market value of the house
• Any business or investment real estate you own
• Cash value life insurance
• Money you are due, such as a tax refund or bonus

Valuing Your House and Car How do you go about placing a value on your house and car? For a house, the value was appraised when you bought it and probably again if you took out a home equity loan. You should have received a copy of the appraisal-after all, you probably paid for the appraisal-and you can use that value. If the appraisal is more than a couple of years old or if you have made major home improvements, the value might not be accurate and you might want to consider having a new appraisal done. Your house will also be assessed for property tax purposes. This assessment is done by the city or county and homeowners are sent a copy of the assessment soon after it is done. If your local assessments are done based on market value (not all are), you might be able to use this value in your net worth calculations. It is probably a good idea, however, to ask a local realtor if the tax assessments in your area are a good indication of a property’s market value. For cars, the best known source is the Kelly Blue Book at http://www.kbb.com. There are three values provided: The trade-in value, or what you might expect to get for the car if trading it in on a new one; the private-party value, or what you might expect to be able to sell the car for in a private transaction; and the retail value, or what you would expect to pay for the car if buying it from a dealer. You should use the private-party value in your net worth calculation.

As for other assets, the opinions of financial experts differ. One such category is personal possessions, such as cars, furniture, collectibles, and artwork. These possessions certainly have value, so there’s a valid argument for including them. They are not readily convertible to cash, however, which is why some experts prefer to leave them out. This choice is up to you as long as you are consistent-in other words, you should consistently include or omit them in each net worth calculation. If you do include them, please remember the following tips:

• If you include a car, be sure to use a valid market value for the car. You must also include any outstanding loan on the car as a liability.
• Most furniture, the kind most of us have, is probably best omitted because second-hand furniture typically brings very little. Valuable antiques are a different matter.
• Collectibles and artwork must be valued fairly at the market value and not what you paid for them. A stamp collection that cost you $5,000 to put together might fetch only 1/10 that amount when sold, and it’s this latter value you should use in a net worth calculation.

Future income generally should not be included. Examples are your next paycheck and things such as pension or social security payments. You can make an exception for one-time payments you know about but have not yet received, such as your annual bonus at work.

Liabilities to Include

Liabilities are easier than assets because you must include all of them. Any money you owe must be counted in the liability column, including personal loans from family members.

What about credit card balances? If you let them ride from month to month, they certainly must be included as a liability. If you pay the balance in full each month, you can omit it, but you also have to omit from your assets the cash you will be using to pay the card off.

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]]> http://www.excel4urbusiness.com/tracking-your-net-worth-in-excel/feed/ http://www.excel4urbusiness.com/calculating-interest-rate-in-excel/ http://www.excel4urbusiness.com/calculating-interest-rate-in-excel/#comments Sat, 05 Apr 2008 12:50:39 +0000 admin http://www.excel4urbusiness.com/calculating-interest-rate-in-excel/ In the calculations that have been presented so far in this chapter, the interest rate was a variable that you either know or had to estimate. But what if you know the other parameters of a loan or other transaction but not the interest rate? Then you can calculate it using the RATE function.

Here’s an example. Suppose you want to take out a $10,000 personal loan from a friend or family member. They agree with the condition that you repay the loan at $300 per month for three years. You’d like to determine the effective interest rate for this deal-here’s where the RATE function comes in. Is this a good deal, or would you be better off taking a loan from the bank?

The RATE function has the following syntax:

RATE(nper, pmt, pv, fv, type, guess)

The first three arguments are required:

• nper is the number of payments for the loan.
• pmt is the payment amount.
• pv is the present value-the amount of the loan.

The other three arguments are optional:

• fv is the future value of the loan, the balance when the payments are completed. Usually this will be 0, which is what Excel assumes if the argument is omitted.
• type specifies when payments are made. Use 0 (the default if the argument is omitted) if the payments are made at the end of the period, 1 of they are made at the start of the period.
• guess is your guess at the answer-your estimate of the interest rate. Because of the way RATE performs its calculations using a trial-and-error iteration, it requires a guess and then works from there to calculate the actual value. If you omit this argument, the value 10% (annual) is used.

As with all Excel financial functions, the period for the rate must match the other arguments. For example, if you enter arguments that include monthly payments, the RATE function’s result will be the monthly interest rate, and you must multiply this by 12 to get an annual rate.

Let’s try out the RATE function. Start with a blank worksheet and then follow these steps:

1.	Enter the labels Principal, Monthly payments, Term in months, and Annual rate in cells B2 though B5, in order.
2.	Format cells C2 and C3 as currency with two decimal places.
3.	Format cell C5 as percentage with two decimal places.
4.	Enter the following formula in cell C5: =12*RATE(C4,C3,C2).

Figure 6 shows this worksheet using the sample data from above. You can see that the effective rate on this loan is just a hair over 5%, which is quite reasonable.

Figure 6. Using the RATE function to calculate the interest rate on a loan.

Technorati Tags: Interest Rate, Excel

]]> http://www.excel4urbusiness.com/calculating-interest-rate-in-excel/feed/ http://www.excel4urbusiness.com/using-the-present-value-function-in-excel/ http://www.excel4urbusiness.com/using-the-present-value-function-in-excel/#comments Fri, 04 Apr 2008 10:44:10 +0000 admin http://www.excel4urbusiness.com/using-the-present-value-function-in-excel/ Present value is similar to future value in that it represents the value of an investment. However, it calculates the value of money you will receive in the future from the perspective of right now. A dollar today is always worth more than a dollar tomorrow because of the interest you can earn on today’s dollar. This might not make sense right off, so let’s look at a couple of examples.

For instance, suppose you know that you will need $10,000 in five years and you want to put a chunk of money away and let it earn interest to meet that goal. You know you can get a reliable 4% return. How much money do you have to put away now for it to grow to $10,000 in five years?

Here’s another example. Suppose your employer gives you a choice of how to take your annual bonus-either $2,300 in a lump sum now or $200 a month for the next 12 months. You could use a present value calculation to determine the present value of that $200 per month, compare it to the lump sum payment and make your decision accordingly. Simply multiplying $200 per month for a year gives you $2,400, but you cannot say that is better than $2,300 today due to interest you might earn over the next year on today’s $2,300.

As another example, you are looking to buy a new car and have decided that you can afford $290 per month payment for the next five years. Knowing the interest rate available on auto loans, you can use present value to determine the amount you will be able to borrow.

A more intuitive way to look at present value is this. Suppose you invest $X per month at Y% interest. The present value is the lump sum you would have to invest at the same rate to end up with the same total at the end of 12 months.

You use the PV function to calculate present value. The syntax is

PV(rate, nper, pmt, [fv, type])

The first three arguments are required:

• rate is the interest rate per period.
• nper is the number of periods.
• pmt is the payment per period.

The other two arguments are optional:

• fv is the future value, the balance at the end of the term, which is 0 in almost all situations. If omitted, the function assumes 0.
• type is 1 if the payments are made at the start of each period, 0 or omitted if payments are made at the end of each period.

To try out the PV function, start with a blank worksheet and follow these steps:

1.	Enter the labels Rate of return, Monthly payment, Number of months, and Present value in cells B2 through B5, in order.
2.	Format cell C2 as percentage with two decimal places.
3.	Format cells C3 and C5 as currency with two decimal places.
4.	Enter the following formula in cell C5: =PV(C2/12,C4,C3).

As before, the monthly payment is entered as a negative value.

The worksheet shown in Figure 3.5 shows an example of evaluating the present value of $200 per month over 12 months assuming a 4% return. Returning to the example presented earlier, where you are offered this $200 per month or a lump sum of $2,300, you can see that the present value of these payments, assuming a 4% return, is $2,348.80. This tells you that the monthly payments are a better deal than the lump sum. If the interest rate were higher, you would see that the PV increases. Of course, if you need the money right away, that is another matter!

Figure 3.5. Using the PV function to calculate the present value of a series of payments.

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]]> http://www.excel4urbusiness.com/using-the-present-value-function-in-excel/feed/ http://www.excel4urbusiness.com/working-with-future-value-in-excel/ http://www.excel4urbusiness.com/working-with-future-value-in-excel/#comments Thu, 03 Apr 2008 04:48:50 +0000 admin http://www.excel4urbusiness.com/working-with-future-value-in-excel/ The concept of future value is quite simple and is based on the fact that a given amount of money received today will be worth more at some time in the future. It’s easy to understand why this is true-money you have now can be invested and earn interest, hence its value increases.

Future value calculations are useful in a variety of situations. For example, you plan to invest $10,000 in a certificate of deposit at 4% for three years; how much will you have at the end of the three years? Another example is putting $50 a month in your daughter’s college fund. How much will you have when she goes to college in 12 years, assuming the rate of return is 5%? You use the FV function for future value calculations.

The FV function has the following syntax:

FV(rate, nper, pmt, [pv, type])

The first three arguments are required:

• rate is the projected rate of return per period.
• nper is the number of periods.
• pmt is the payment per period.

The other two arguments are optional:

• pv is the present value (the amount you are starting out with). If omitted, the function assumes 0.
• type is 1 if the payments are made at the start of each period, 0 or omitted if payments are made at the end of each period.

The FV function is quite flexible. If you have a situation where you are starting with nothing and making regular payments, you will set pv to zero and enter a value for pmt. On the other hand, if you are starting with a lump sum and not making any payments, set pv to the initial value and enter 0 for pmt. You can have both an initial amount and regular payments, too, of course.

Choosing an Interest Rate In some situations, such as when you are quoted loan terms by a bank, you will know the precise interest rate to use in your calculations. In other situations, such as most future value calculations, you must estimate a rate. This is because you are in effect asking a “what if” question-”If I invest this money at XX%, what will my result be?” When in doubt, I recommend using a rate that is readily available for safe investments, such as certificates of deposit and money market accounts. I recommend this because it is better to be conservative than to use an interest rate that might provide gratifying results but is unrealistic.

To try out the FV function, start with a new worksheet and then follow these steps:

1.	Enter the labels Initial amount, Rate of return, Monthly payment, Number of months, and Future value in cells B2 through B6, in order.
2.	Format cells C2, C4, and C6 as currency with two decimal places.
3.	Format cell C3 as percentage with two decimal places.
4.	Enter the following formula in cell C6: =FV(C3/12,C5,C4,C2).

The resulting worksheet is shown with some data entered in Figure 4. You can see that if you put $1,000 in an account paying 5% interest and add $40 every month, you’ll have $1,542.32 at the end of the year. Please note that in keeping with Excel’s cash flow model, the initial amount and monthly payment are entered as negative values because this is money you are paying out. The future value is correctly calculated as a positive value because this is money you will receive.

Figure 4. Using the FV function to calculate the future value of an investment.

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]]> http://www.excel4urbusiness.com/working-with-future-value-in-excel/feed/ http://www.excel4urbusiness.com/calculating-principal-payments-with-excel/ http://www.excel4urbusiness.com/calculating-principal-payments-with-excel/#comments Wed, 02 Apr 2008 04:39:43 +0000 admin http://www.excel4urbusiness.com/calculating-principal-payments-with-excel/ When you make a payment on a loan, each payment is divided into two parts:

• Part of the payment is for that month’s interest charge.
• The remainder of the payment goes toward paying down the principal.

Each month you pay down the loan balance, or principal, by some amount. This means that the next month the interest charge will be less because the charge is calculated as the interest rate multiplied by the balance. The total payment amount is fixed, which means that each succeeding month less of your payment goes toward interest and more toward the principal. To calculate the amount that goes toward principal for a specific payment, use the function.

To see an example of this, please refer to Figure 2. This worksheet presents an amortization table for a $10,000 loan at 5% for 12 months. The three columns of data are

• Principal- The amount of each payment that goes toward the loan balance. This is calculated with the PPMT function. You can see that this amount increases for subsequent payments.
• Interest- The amount of each payment that goes toward interest. This is calculated with the IPMT function (covered in the next section). You can see that this amount decreases for subsequent payments.
• Total- The total monthly payment, the sum of principal and interest. This amount stays constant for the entire term of the loan.

Figure 2. This amortization table shows how the principal payment increases while the interest payment decreases over the life of a loan.

Amortizing Loans Like the other loan-related Excel functions in this chapter, PPMT is applicable only to the standard amortizing type of loan. These are the most common type of loan, and specify equal payments over the life of the loan. There are other specialized types of loans, such as balloon loans and zero-interest loans, and the functions covered in this do not apply to these loans.

The PPMT function uses the following syntax; you’ll note that most of the arguments are the same as for the PMT function:

PMT(rate, per, nper, prin, [fv, type])

The first four arguments are required. They are

• rate is the interest rate for the loan.
• per is the period for which you want the principal payment. This argument must be in the range 1 to nper.
• nper is the term of the loan expressed as the number of payment periods.
• prin is the principal, the amount you are borrowing.

As explained earlier for the PMT function, both rate and nper must use the same time unit (usually months). The last two arguments are optional (as indicated by the brackets in the formula):

• fv is the future value of the loan, or the amount still owed when you have completed payments. Because loans are almost always paid off in full, you will use 0 for this argument or omit it, in which case Excel assumes 0.
• type indicates when payments are made. Use a value of 1 if payments are made at the start of each period. Use a value of 0, or omit the argument, if the payment is made at the end of each period.

In most situations you omit both of these optional arguments.

Calculating Interest Payments Given that you can use PPMT to calculate the principal part of a specific loan payment, what about getting the interest amount? It’s easily done as follows: Use PMT to calculate the monthly loan payment. Use PPMT to calculate the principal amount for the payment of interest. Subtract step 2 from step 1 to get the interest part of the specified payment. You can also use the IPMT function to calculate the interest part of a payment. Please refer to Excel help for more information on this function.

To try out the PPMT function, you can add to the worksheet you created earlier for the PMT function (refer to Figure 1. from the previous post). Then follow these steps:

1.	Put the labels For payment #, Principal, and Interest in cells B7 through B9, in order.
2.	Put the following formula in cell C8: =PPMT(C3/12,C7,C4*12,C2).
3.	Put the following formula in cell C9: =c5-c8.
4.	Format cells C8 and C9 as currency with two decimal places.

A sample calculation is shown in Figure 3. You can see that for the specified loan, the first payment consists of $232.29 going toward principal and $73.33 going toward interest. Change the payment number to 60-the last payment for the loan-and you’ll see the amounts change to $304.22 and $1.39 respectively.

Figure 3. Using the PPMT function to calculate the principal component of loan payments.

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]]> http://www.excel4urbusiness.com/calculating-principal-payments-with-excel/feed/ http://www.excel4urbusiness.com/taking-control-of-your-finances/ http://www.excel4urbusiness.com/taking-control-of-your-finances/#comments Tue, 01 Apr 2008 12:56:52 +0000 admin http://www.excel4urbusiness.com/taking-control-of-your-finances/ If you ask people what they do not have enough of, the most common answer is likely to be “money.” No matter how hard you work, no matter how good your job is, it can be a struggle to make ends meet while maintaining the standard of living you want. Can you do anything about this situation? Yes, you can! One approach is to bring in more money, but that’s not something I can help you with. The other is to take control of your finances, and that’s something I definitely can help you with!

Facing the Problem

Before getting down to details, it is a good idea to look at the problems facing many people today when it comes to their finances. The majority of Americans are financially illiterate. If you fall into this category, don’t blame yourself-after all, personal finance classes are not offered in most high schools or colleges and, even when they are, they are usually a low priority for most students. People are expected to somehow absorb all the intricacies of personal finance on their own, and, in my opinion, that’s asking a lot.

Some people are hesitant to admit they do not know much about personal finance. In our society, competence is valued and you might feel embarrassed to admit you don’t know much about the topic. That’s exactly the wrong attitude! Competence comes from learning, and the first step in learning is admitting you need to learn. Getting this book was a good first step.

Another source of problems is that some people equate finances with investing. There is undoubtedly something very alluring about the stock market and the chance to see your investments grow over the months and years. Investing is, in fact, important, and several chapters of this book are devoted to it. But investing is only part of the personal finance picture.

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