« »

Monday, February 14, 2011

How financial planning calculators can help you budget

Financial planning calculators
Financial calculators help add accuracy to financial planning
Financial planning calculators can help you budget because they accurately assist in the process of evaluating and reorganizing finances when used correctly.

The benefits of financial calculators include being able to compare and balance numbers such as amortization schedules, net interest margin, debt to income ratio and other personal financial variables that are helpful when budgeting.

No matter how simple or complex your financial situation, financial calculators can help you with it.

Financial calculators help you budget when the following steps are implemented. These steps from start to finish illustrate a process by which budgeting with financial calculators takes place. The last two steps are the more difficult of the five because they are more involved and may require acclimation. Even though the process of using a financial calculator in a budget may seem like a chore, once you learn how to do it the first time it becomes easier and faster thereafter.

• Be aware of the different types of financial calculators
• Know what financial calculators do
• Locate financial calculators for use
• How to use the financial calculator
• Incorporate financial calculations into budget

What financial calculators do

Financial calculators address a wide range of financial matters relevant to financial planning such as debt management and maintaining personal cash flow. There are a number of financial calculators that can be used for varying financial functions; these functions include financial planning, and budgeting for and within financial planning.

The different types of financial calculators include hand held calculators, calculator software applications and online calculator applications. There are several functions these calculators may possess, some of which may be incorporated into one calculator and in other cases individual calculators. Examples of financial calculators are listed below:

• Texas Instruments BA II Plus financial calculator
• Hewlett Packard (HP) 17BII+ Financial Calculator
Bloomberg financial calculators
Financial calculators at financial calculators.com
BankRate online financial calculators

How to use financial calculators

Define your financial objective

Knowing specifically what you want your budget to do can help you decide which financial calculator(s) are the best choice. Since everyone's unique financial situation involves different assets, income, and expenses the right financial calculators to use can differ. Some example objectives are listed below:

• Finding out how much to lower debt and/or increase credit
• Assessing the option to retain or refinance a mortgage
• Determining the difference in net returns between investments
• Knowing how to properly valuate an asset
• Forecasting future values of savings plans

Choose the right financial calculators 

After defining a financial objective it should become more clear which financial calculator(s) are most appropriate. Sometimes all that is needed is a simple calculator with basic functions such as multiplication, division, addition and subtraction. For example, an amortization calculator would be helpful in assessing mortgage refinance options.

Implement and analyze calculations

The results of financial calculations give you a picture of what happens to your finances when certain actions are taken. When the results match your financial goals then the financial calculator has helped you achieve that objective. For example, when determining the difference between two investments the future value function on a financial calculator indicates saving less money per month for investment B leads to the same net value as investment A. If your goal is to do more with less, the financial calculator has assisted with your financial intention.

Incorporating financial calculations into budgets

Each budget requires different calculations that are defined by financial goals. Sometimes the only financial calculations needed may be adding up expenses and subtracting them from income to make sure the former is less than the latter. Other times multiple sets of calculations may be utilized to arrive at numerous financial assessments. For example, when retirement planning several functions are considered including age, savings, annual savings contributions, annuity income requirements, inflationary considerations etc. This type of budgeting involves present financial decisions for the future.

Another example of a budget that makes use of financial calculators is in examining the financial benefit of a fuel efficient vehicle or energy efficient appliance purchase. Moreover, how many years does it take for the purchase to generate budget cost savings and does that future gain offset the present cost in terms of alternative financial decisions such as an investment, and operating cost of existing equipment. In this case the financial calculations involved would include financial planning with budget forecasting under two or more sets of present budgets.

The number of budgeting possibilities for which financial calculators are used is dependent upon the complexity of the budget. To further illustrate, budget efficiency may make use of interest and cost related calculators whereas budget assessment may make use of ratio or percentage calculations.

In other words, budgeting can have stages such as organization,  assessment and  re-organization that each involve different monetary calculations such as personal cash flow balancing, asset management, and multi-cost and variable calculations. For example, mortgage calculations that simultaneously incorporate interest, payment, and time or investment budget calculations that weigh risk against margin requirements and premiums.

Image license: Jorge Franganillo, CC BY 2.0