The Mathematics of Personal Finance

Personal Finance is simply about managing four components of our income, expenses, savings and investments. Managing your money is about moving them forward/backward in time. Let me explain.

You maximize your income and optimize your expenses in the present time to plan for your retirement expenses in the future. You make efforts to maximize your savings and investments of the present time to plan for your future goals.

What we just discussed can be represented in a personal finance equation, which is:

Income (t) – Expenses (t) = Savings (t) + Investments (t) where time t signifies moving money, or purchasing power, forward in time.

Much of financial planning is based on mathematics. But fortunately the mathematics is not really complicated. You probably learned the basic principles in school.

For example, one of the concepts is that principal multiplied by interest rate over time equals interest earned. Interest = Principal × Interest Rate × Time. You read about that in class 5!

Mathematical reasoning is necessary all through life. This ability also affects decisions we make in personal finance.  So it is a good idea to understand/revisit the basic principles of math that you need to understand in order to manage your finances. And these concepts can help you with all your financial decisions like retirement planning and planning for your investments.

We’ll discuss the mathematics of personal finance in the next few posts. Stay tuned.

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