Simple Formulas to Know When Growing Wealth

There's nothing overly complex here—just a few straightforward formulas to understand how your money can grow or shrink. These concepts help you grasp the impact of your financial decisions, whether you're on the saving and investing side or the borrowing and owing side. Knowing these basics can make a significant difference in your financial journey.

Simple Interest

Formula:
Interest = Principal × Rate × Time

Example:
You deposit $1,000 into a savings account that earns 2% annual interest. How much interest will you earn in 1 year?
Interest = $1,000 × 0.02 × 1 = $20

Compound Interest

Formula:
A = P (1 + r/n)^nt

Example:
You deposit $1,000 into a savings account that earns 2% annual compound interest. How much will you have after 5 years?
A = $1,000 (1 + 0.02/1)^1×5 = $1,104.08

Net Worth

Formula:
Net Worth = Assets - Liabilities

Example:
You have $1,500 in a checking account, a $500 phone, and a $500 loan. What's your net worth?
Net Worth = $1,500 + $500 - $500 = $1,500

Return on Investment (ROI)

Formula:
ROI = (Gain - Cost) / Cost

Example:
You invest $100 in a stock that grows to $120. What's your ROI?
ROI = ($120 - $100) / $100 = 20%

Rule of 72

Formula:
Years = 72 / Rate

Example:
If you want to double your money with a 4% annual return, how many years will it take?
Years = 72 / 4 = 18 years

Budgeting

Formula:
Income - Expenses = Savings

Example:
If your monthly income is $2,000 and your monthly expenses are $1,500, then your monthly savings would be $500.
Savings = $2,000 - $1,500 = $500

Debt Repayment (Monthly Payment)

Formula:
Monthly Payment = (P × c) / (1 - (1 + c)^-n)

Example:
If you have a loan of $10,000 with an annual interest rate of 8% and a repayment period of 3 years, your monthly payment would be:
c = 0.08 / 12 = 0.0067
n = 3 × 12 = 36
Monthly Payment = (10,000 × 0.0067) / (1 - (1 + 0.0067)^-36) = $304.64

Savings Goal

Formula:
Monthly Savings = Goal Amount / Number of Months

Example:
If you want to save $5,000 for a new laptop in 2 years, your monthly savings would need to be:
Monthly Savings = $5,000 / (2 × 12) = $208.33

Cost Per Use

Formula:
Cost Per Use = Total Cost / Number of Uses

Example:
If you buy a $60 video game and play it 30 times, each play costs:
Cost Per Use = $60 / 30 = $2