lecture

Money grows faster as the compounding period becomes shorter
- Interest earned on interest more frequently grows money faster
Put PV in as negative if solving for interest rate
Assets
- Liquidity: how quickly an asset can be converted to cash without penalties or a significant reduction in value
- Fair market value: the price someone would realistically pay you to buy the asset
Earnings goes to budget, not balance sheet

reading

Interest: price paid for the use of money
Compound growth
Federal Deposit Insurance Corporation and National Credit Union Administration protect savings deposit up to $250,000
Let $I$ = periodic interest rate and $P$ = number of periods in year
- Annual Percentage Rate (APR) = $I \times P$
  - Quoted for loans
- Annual Percentage Yield (APY) = $[(1 + I)^{P}] - 1$
  - Quoted for savings

Amortization: paying off loan or debt using series of payments
Calculate rough number of periods needed to double money using Rule of 72
Estimate approximate interest rate needed to double money by dividing 72 by goal time horizon

FV of lump sum: $F V = P V (1 + I)^{N}$
PV of lump sum: $P V = \frac{F V}{( 1 + I ) ^{N}}$
FV of annuity: $F V A = \frac{PMT}{I} [(1 + I)^{N} - 1]$
PV of annuity: $P V A = \frac{PMT}{I} [1 - \frac{1}{( 1 + I ) N}]$
PV of annuity due: $P V A D = \frac{PMT}{I} [1 - \frac{1}{( 1 + I ) N}] (1 + I)$

Assets: what you own
Liabilities: what you owe
Net worth = assets - liabilities
- Important for lenders
Equity: ownership position in asset
- e.g. car equity is $4, 000 i f yo u ha v e$ 14,000 down payment and a $10,000 loan
Good debt: investing in human capital
Bad debt: used to buy something that goes down in value fast or is consumed right away
Current ratio: proportion of monetary assets to current liabilities
- Should be able to pay short term debts with monetary assets — should be bale to use money in bank to pay off credit cards and other high-interest consumer debt that should be repaid within a year
- At minimum, should have $1 in l i q u i d s a v in g s f ore v ery$ 1 of short-term debt
- Should > 100%
Debt ratio: proportion of total liabilities to total assets
- Should < 40%

Surplus: money works well for you
Deficit: expenses exceed income
Savings ratio: percentage of money that you are setting aside on a regular basis
- At least 12%
  - Much higher if want to retire early
Consumer debt-to-income ratio: percentage of income used to pay debt
- Total consumer debt payments / gross income in time period
- No more than 15%
Total debt-to-income ratio: percentage of income to pay all debts
- No more than 15% for renters - cost of rent
- No more than 36% for homeowners
Emergency fund ratio
- 3–6 months
- All expenses - taxes, savings, nonessential expenses