Now that you’ve been trained in some of the mathematics of finance, it’s a good time for you to investigate the details of your own finances, and the finances of any family members you depend on. No longer do you have to trust financial institutions or hope that your finances work out favorably in the future, but now you have the education to verify these details for yourself. This is a good idea; everyone should do this. The whole point of this assignment is urge you to do this right now, and provide you some academic points for motivation.
Deliverable
Write or type a report of your investigation in a narrative non-fiction style (examples) that includes a description of what you investigated and the calculations you carried out to verify the details of your current finances and analyze the finances of your future.
To afford you the freedom to investigate whatever financial aspects of your life impact you most, there will be no grading rubric for this assignment, so your report will be graded “on impression”; if it looks like you did a good job, spent earnest time and effort on this, and correctly did the requisite calculations then you’ll get a good grade. For a sample of how I would write this up, see:
Typographic Requirements
Limit the length of your report to a single piece of paper. Design it to be pleasant to read; there’s no need to double-space the body text.
Ideas to Get You Started
If you don’t know what to investigate, you can come talk to me and we can brainstorm together. Otherwise, here are some ideas.
Checking or Savings Account
Do you have a checking or savings account? What’s the interest rate on the account? Is that interest rate an APR or an APY? (Given one of those, can you calculate the other?) How often are interest payments deposited into your account? Check the last interest payment you received; is it correct according to the advertised interest rate? If not, why? Are there any fees associated with your account that make the computations more complicated? How does the interest rate of this account compare to the current inflation rate, what does this difference mean in terms of the value of your account balance?
There exist checking accounts, usually marketed as money-market accounts, that offer much higher-than-average interest rates in exchange for more restrictions on the account (high minimum balance, withdrawal limits, etc). Look up an example of such an account, and compare its advertised interest rate to the rate on your current account. Do an analysis of how much more (or less) interest you’d be earning if your money was in this account.
College Tuition Loans
Have you taken out loans to cover your expenses as a student? How much are they? How much total in loans are you planning to take out while in college? What’s the interest rate on them? Are they subsidized or unsubsidized? When you start paying them back, is there a fixed minimum monthly payment? or is there a fixed term on the loan by which you have to have paid it back in full? In either of the previous cases, you can calculate one piece of information from the other: given your monthly payment, what’s the duration of the loan? or given the duration of the loan, what must your monthly payments be?
Total Lifetime Earnings After University
You may have decided to enroll in University because it affords you an opportunity to have a higher-paying job after graduation than if you had instead gotten a job right after high school. If this describes you, you may want to considering whether or not this is a sound financial decision. What career are you aiming for after University, and what’s its annual expected income? Had you not come to University, what career would you have aimed for, and what’s its annual expected income? Accounting for the fact that you would have been earning for longer had you not enrolled here, after how many years of working after University will it become financially more profitable than had you not? How do you account for inflation in this calculation?
Other Loans or Lines of Credit
Do you have any outstanding debt, or any lines of credit? What is the interest rate on your debt balance? or what is the interest rate on your credit balance? What’s your plan to pay off that balance?
Housing Costs: Mortgage or Rental
Do you or your family have a mortgage right now? If so, check the details of your mortgage. Are you renting? How long do you plan to be renting? How does your monthly rent compare to a monthly mortgage payment on a new mortgage in this area? Be sure to incorporate home-owners insurance, escrow, and any other fees into your monthly mortgage costs
Planning on Mortgaging a Property
Do you plan on taking out a mortgage, either on a residential property or for a business, anytime in the future? What’s the total cost of the property in the city you plan on doing this? What’s a typical down-payment size? What’s a projection for the interest rate? What sort of monthly income will you need to afford the mortgage payments on this property? Be sure to incorporate home-owners insurance, escrow, and any other fees into your monthly mortgage costs
Some quick facts: The vast majority of mortgages have a 30-year fixed term. A typical interest rate on a mortgage is based on the Federal Funds Rate. The classic advice is that “28% of your gross income should go towards housing.” This advice is suspect given recent trends in the housing and labor market, but should still be considered when deciding what monthly mortgage payment you can afford given your projected income.
Stock/Bond/Currency Investments
Do you own stock? or stock options? or government bonds? or foreign currency? or cryptocurrency? If you do, there is certainly some mathematics to investigate here: what is the historical average rate of return on your investment? What is your average annual rate or return on your investment? How do these two rates compare? How do these rates compare to average returns on a broad-market index fund, say one that tracks the S&P 500? Given historical rates on your investment, how far in the future do you have to wait before the value of your investment crosses some threshold, say $1 million?