How can I solve financial problems using a calculator?

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Editor's note: this one isn't truly a Frequently Asked Question, but MIFP posters often ask questions about savings growth rates, debt pay-down, and similar topics that could be solved easily using a financial calculator.

A financial calculator makes short work of seemingly complicated problems...how fast will money grow at a certain interest rate? How much will you end up with if you save $500 a month? How fast will you pay down a $1,500 debt if you send payments of $75 a month and are charged 14% interest along the way? These are simple calculations with a financial calculator such as the TI Business Analyst or the HP-12C.

First it's important to get familiar with the basic principles of time value of money, so you know what you're calculating. Once you get those down it will just be a matter of keying in the right information. Every calculator works more or less the same and you'll always be typing in all but one of these variables (to solve for the missing one):

  • PV - present value
  • FV - future value
  • %i - interest rate
  • PMT - amount of periodic payment
  • N - number of periods

Your calculator's manual will give specific examples on how to use this but here are some key points to keep in mind:

  • Money you receive has a positive sign, and money you pay or deposit has a negative sign, when keying in PV or PMT or FV. This is very important and a little confusing at first. If you borrow money to buy a house, the value of the mortgage, which is money the bank handed to you, is positive (PV), and your mortgage payments (PMT) have a negative sign. If you invest in a CD, your initial deposit (PV) is negative, and the amount you receive when it matures (FV) is positive. This gets to be second nature after you do a bunch of calculations.
  • %i is the interest rate per period, not per year (unless that's the period you're using). If you're compounding interest monthly you'll need to key in your monthly interest rate, not your annual interest rate.
  • N is the number of periods. If it's a 30 year mortgage that means N=360 (30 years X 12 monthly payments).

Two simple examples...

What is the growth of $1,000, plus $200 added per month, at 8% interest, over 5 years?
PV=-1000, PMT=-200, %i=0.08/12, N=60, let calculator solve for FV (variation: if you want to see where it grows if you don't add the $200/month just set PMT=0)

How much time is required to pay off a $1,500 debt on a credit card that charges 14% interest, if you pay $75 per month?
PV=1500, PMT=-75, %i=0.14/12, FV=0, let calculator solve for N (months)

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