----------------- TMONEY Version 2.01 ---------------------- TMONEY (Time Values of Money) Copyright 1986,1987 Gale R. Horst 5361 Browntown Rd. Sawyer, MI 49125 (616) 426 - 3734 ----------------------------------------------------------------- This product is distributed on an "as is basis" with no express or implied warranties. Copyright for this product is held by the above author. This version of TMONEY.EXE may be copied, distributed, or uploaded to any BBS without written consent of the author as long as the copyright and shareware notices are intact. .pa --- Table of Contents --- General Instructions . . . . . . . . . . . . . . . . . . . 3 Present value of a single future payment . . . . . . . . . 4 Future value of a single present payment . . . . . . . . . 5 Monthly installments on a present payment . . . . . . . . 6 Present value of monthly installments . . . . . . . . . . 8 Savings Planner . . . . . . . . . . . . . . . . . . . . . 9 Value of Monthly Deposits . . . . . . . . . . . . . . . . 10 Duration of Monthly Withdrawals . . . . . . . . . . . . . 11 Retirement Planner . . . . . . . . . . . . . . . . . . . . 12 .pa --- General Instructions --- To start up this program type: "TMONEY" and press the Return (or Enter) key. A "sign-on" screen will appear. Press the Return key again and the copyright notice will appear. Press the return key once more and the main menu will pop up. From here on the TMONEY software package is easy to follow. Simply position the cursor bar using the up and down arrow keys (also marked 8 and 2 on most PC keyboards) and press the Return key to select the highlighted item. (The Home and End keys also take you to the top or bottom item of the menu respectively.) From there you will be asked to fill in the values required for the various financial computations. After the results are output to the screen you may select to output the data to a printer from a submenu. Items are selected from the submenu in exactly the same manner as from the main menu. Note that the main menu has a HELP selection which is the second item from the bottom. Selecting this will bring up a help submenu where you may select an item. A help screen will appear giving you an example of how a particular feature is used. Some color is used in TMONEY in order to make viewing more pleasant on color systems. However, on some systems (such as laptops using a LCD screen) some screens may be difficult to read. If so, invoke TMONEY by typing "TMONEY /B" which will disable the color. Questions or suggestions from registered users regarding this software package are always welcome. If you need more information feel free to write or call (during reasonable hours) for assistance. This product could represent a much larger investment were it to be distributed through normal commercial methods. However, only a minimum fee is requested by users of this shareware software package. The "shareware" method by which TMONEY is being distributed allows you to use the software before deciding that it fits your needs. If you feel it is worth the minimal shareware contribution requested, please become a registered user. TMONEY is updated continuously and registration allows you to be informed of any major upgrades in the package. Considering the many hours of work that go into even a small software package like TMONEY, making a "profit" on this package is not expected. However, the continuous letters and registrations certainly help the morale of shareware authors. I sincerely hope that TMONEY will assist you in making sound financial decisions in planning for your financial future. - the author .pa --- Present Value Feature Description --- The Present value of a single future payment computation allows the selection of a future dollar amount, interest rate and period of months. The result is a sum of money which, if deposited into an interest bearing account (or investment) with the interest received being added to the original amount at monthly intervals (compounding), will grow to equal the future dollar amount after the selected period of months. EXAMPLE: "If I want to have $10,000 accumulated in a college fund for my son (who is age 0 now) by the time he is 18 years old, what amount of money in a single deposit would it take to achieve this if I can expect to get 9% interest?" ANSWER: Select PRESENT VALUE from the main menu and answer the questions as follows: Enter # of months --> 216 Enter annual interest rate --> 9 Enter future amount --> $10000 The present value is $1,990.99 .pa --- Future Value Feature Description --- Future Value computation assumes that a sum of money will be left in an interest bearing account for a period of months with the interest earned added to the account balance at monthly intervals. EXAMPLE: "If I deposit $1,500 into my Individual Retirement Account now, how much will it be worth when I retire in 15 years if the interest rate remains at 9% ?" ANSWER: Select FUTURE VALUE from the main menu and answer the questions as follows: Enter # of months --> 180 Enter annual interest rate --> 9 Enter present value --> $1500 The future value is $5,757.06 .pa --- Monthly installments (Loan Amortization) Feature Description --- This is a standard loan amortization. After selecting the amount, rate, and years of the loan the monthly payment is shown. If you wish to see the itemized table of payments you can select this option by answering yes ("y") to the next question. If you press "y" then you will be asked whether you want to see the entire monthly payment table or if you only want yearly totals (every 12th payment). If you are considering a long payment period such as a home mortgage then it may be more useful to only look at the yearly totals. By examining the table you can see how much of each regular payment is actually applied toward the loan (principal) and how much is paying the interest for that month. Note that the total of all interest paid is also kept in the last column. This is useful in comparing the final cost of loans with various interest rates or various lengths. EXAMPLE 1: "I am considering buying a new car. After trading in my current automobile, I will need to get a loan for the balance remaining which will be about $8,500. If I can get 48 month financing at 9.9% what will my payments be and how much will the total finance charge be for the life of the loan?" ANSWER 1: Select MONTHLY INSTALLMENTS from the main menu and answer the prompts as follows: Enter the term of the loan in months --> 48 Enter the annual interest rate (APR) --> 9.9 Enter the amount of the loan --> $8500 The monthly payment is $215.17 Would you like to see the table? Y Monthly or yearly payment summary? M Now press a key to move through the screens until the last years payments are shown (months 37 - 48). This will give us the second part of the answer. The month (lower left of screen) will be 48. Look over to the far right at the last entry under the total interest column. The value $1,828.35 is the total cost of the loan. Always check the monthly payment as well as the total cost of the loan against what the loan officer shows you (In most states the lender is required to give you, in writing, the total cost of the loan.). You can forgive them (or this software author) for being off by a maximum of a couple of pennies on the monthly payment. This is due to a very slight difference in the method of computation. However, if you are off by more that a few cents, they have probably tried to tack on some life or disability insurance on the loan without your approval or misrepresented the actual APR for the loan. (Yes this happens quite often.) Another interesting example on the subject of auto financing. We all remember the car commercial advertising 2.9% financing. Let's look at their example. With 20% down you could finance up to 36 months at 2.9% (on selected models). However, the commercial stated "get 2.9 percent financing or $1,000 cash back". In other words let's assume you could borrow $10,000 at 2.9% or take the $1,000 rebate and go to your credit union and borrow $9,000 at 10%. You will find that the monthly payments at $10,000 at 2.9% come to 290.37 while the payments on $9,000 at 10% are $290.40. Hummm .... just as we suspected, the difference in the finance charges were tacked on to the price of the car! For one more example on the loan calculations let's look at a home mortgage. EXAMPLE 2: "I want to refinance my home for $55,000 at 9.5% on a 30 year mortgage. How much will the payments be and should I borrow the money for 30 years or can I afford a 20 year mortgage? How much will I save on a shorter term loan? ANSWER 2: Select MONTHLY INSTALLMENTS from the main menu and answer the questions as follows: Enter term of loan in months --> 360 Enter annual interest rate (APR) --> 9.5 Enter amount of the loan --> $ 55000 The monthly payment is $462.46 Answer "y" for the table and "y" for yearly. The last entry under Total Interest for year 30 indicates the total interest paid over the life of the mortgage will be $111,489.13. Now compute the loan again except for 240 months rather than 360. Now we find that the payments are $512.67 and the total cost over the life of the loan is $68,041.31. By comparing we can now see that if we can afford to pay an additional $50.21 per month then we can save a total of $43,447.82 over the term of the loan (besides getting rid of the mortgage 10 years earlier!). That's quite a savings! .pa --- Present value of monthly installments Feature Description --- This function computes the amount of money needed to support monthly withdrawals over a specified period. EXAMPLE: "When I retire I would like to be able to withdraw $500 per month from my retirement savings and know that I have enough money to last me for at least 20 years. If I assume that I will be able to get at least 8% on the unused portion of my money, how much cash will I need to have in my bank account when I retire and start my monthly withdrawals?" ANSWER: Select PRESENT VALUE INSTALLMENTS from main menu and answer the prompts as follows: Enter # of months during which installments will be made -->240 Enter annual interest rate for remaining balance -->8 Enter amount of monthly withdrawals --> $500 The present value is $59,777.14 Now we can go to the savings planner function and see how to accumulate this amount of money for retirement. Or, better yet, do a more complete retirement plan using the retirement planner function from the main menu. .pa --- Savings Planner Feature Description --- The savings planner helps you plan and meet your savings goals. After input of the savings goal, interest rate, and years to achieve it, the required monthly deposits are computed. EXAMPLE: "I want to have $10,000 in my savings account 5 years from now to buy a new boat. I am currently getting 6.5% interest on my savings. How much must I deposit each month to reach my goal in 5 years?" ANSWER: Select SAVINGS PLANNER from main menu and answer the prompts as follows: Enter your savings goal $10000 How many years from now do you want to reach your goal? 5 Enter the rate of interest: 6.5 The monthly deposit required are $137.43 Of the $10,000 we have accumulated, we have deposited only $8,245.80 and the other $1,754.20 was interest. Not that boat loans are going for about 14% (or more). A $10,000 loan at 14% for 5 years would have monthly payments of $232.68. The bottom line is that by saving first rather than borrowing we save a total of $5,017.00 (that's half the cost of our boat!). ("But I want the boat now! ...... oh well, it looks good on paper!") .pa --- Monthly Deposits Feature Description --- Monthly deposits function will inform you of how much money you will have accrued in your savings (or investment) account in a particular number of years if given the amount of monthly deposits and the rate of interest. EXAMPLE: "I am currently putting $50 per month into a 10.5% annuity. How much will this be worth if I continue this for 15 years?" ANSWER: Select MONTHLY DEPOSITS from main menu and answer the prompts as follows: Enter # of months --> 180 Enter annual interest rate --> 10.5 Enter amount of each monthly deposit --> $ 50 The future value is $21,701.49 Of this final amount, we have deposited only $9,000 into the annuity. The other $12,701.49 is interest. .pa --- Monthly Withdrawals Feature Description --- Monthly withdrawal function will determine how long it will take to deplete a savings account if given the size of the beginning balance, monthly withdrawal amount, and the rate of interest received on the remaining balance. EXAMPLE: "I will have $100,000 in my retirement account when I retire. If I plan to withdraw $750 per month after I retire, how long will my money last assuming I can get 8% interest on the amount of money I haven't withdrawn yet?" ANSWER: Select MONTHLY WITHDRAWALS from the main menu and answer the questions as follows: Enter your beginning savings amount $100,000 Enter the amount of the monthly withdrawals $750 Enter the rate of interest: 8 The answer is 27 years / 7 months with $511.35 left over. Note that the total amount of money I will have withdrawn over the 20 years (remember that we started with $100,000 in the account) will amount to $248,250.00. .pa --- Retirement Planner --- GENERAL INSTRUCTIONS: The retirement planner utilizes many of the other functions to automatically guide you through a fast retirement planning session. Once you have answered the six opening questions the results are computed and displayed on the screen. After reviewing the screen, you may change the values which were input at the six opening prompts. To change a value, select the item by using the up/down arrows on the numeric key pad. To change the value, simply type the new value followed by the RETURN/ENTER key. The calculations are then recomputed and displayed again. Values may be changed any number of times. When you are through you may send the screen to your printer by pressing the F10 key or return to the main menu by pressing the ESC key. For those interested, following is an example of how TMONEY Version 2.0 computes the results using the information you input. Lets compute an example then look at how the values are computed. The discussion that follows assumes values from the following input example. Current Age: 42 Retirement Age: 65 Monthly retirement income needed today: 1000 Inflation rate: 3 Current Funds Value: 22000 Assumed interest on retirement funds: 9.5 The screen will show the following results: --- Retirement Planner --- Current Age 42 Retirement Age 65 Months Until Retirement 276 Monthly Retirement Income Needed In Today's Dollars $1,000.00 Yearly Inflation Rate 3.00% Actual Retirement Income Needed $1,991.99 Current Retirement Funds Current Funds Value $22,000.00 Interest Rate on Current Funds 9.50% Retirement Value of Current Funds $193,918.67 Actual Cash Needed at Retirement $327,065.05 Less Retirement Value of Current Funds = $133,146.37 Monthly Deposits Required to Meet Needs $136.28 Assumed Interest on Retirement Funds 9.50% ============================================================== .pa The meaning of the results is described as follows: Months Until Retirement: Assumes full years. Actual Retirement Income Needed: Future value of 1000 for 276 months at 3%. This is to take in to account that if you would need $1000 of retirement income if you were retire today, then an average of 4% inflation per year would necessitate a monthly income of $1,991.99 by the time you retire in order to maintain the same standard of living. Retirement Value of Current Funds: Future value of $22,000 at 9.5% for 276 months. This shows what you what the money you currently have set aside earning interest will compound to by the time you retire. Actual Cash Needed at Retirement: This item is always up for debate as far as how this amount is computed and what it represents. The method currently used by TMONEY 2.0 is similar to the concept used by many life insurance computations. This is based on the assumption that you will live through age 99. Therefore, you could leave the $327,065.05 invested at 9.5% (We used 9.5% in our example. This rate is what ever you select.) and withdraw a monthly income (plus an annual raise in accordance with the inflation rate we selected) from the account and not run out of money until age 99. In this case we were told by TMONEY that by the time we retire at age 65 we would need a monthly income of $1,991.99 to equal a $1000 monthly income now. This is where a lot of other retirement plans make a fatal mistake. Many times it is assumed (for no logical reason) that inflation will no longer affect us after we retire. People sometimes plan to purchase a life annuity which guarantees an income for life but makes no provision for inflation. However, TMONEY assumes that the same rate of inflation will continue (in our example we used 3%). In other words, the first year of retirement we will withdraw $1,991.99 each month. Then the second year we will give ourselves a raise and withdraw 3% more each month which is $2,051.75 per month. The third year our monthly withdrawals will be $2,113.30, the fourth $2,176.70 and so forth. If you figure out the math, you will see that your retirement account balance will be increasing the first number of years of retirement since your withdrawals are actually less than the interest is earning. However, as you increase your monthly withdrawal amount each year you will begin taking out more than the interest and you will eventually run out of money at age 100. Less Retirement Value of Current Funds: After subtracting the future value of your currents funds from the actual cash needed at retirement this $133,146.37 is what you still must plan for. Monthly deposits required (described below) shows you how you can accumulate this amount by the time you retire. Monthly Deposits Required: This is the amount of money you need to deposit every month to fulfill your retirement plan. As noted above, this assumes full years. .pa OTHER COMMENTS FROM THE AUTHOR: First looks at a planned retirement may look unrealistic as far as the monthly deposits required. My first looks at how much I would have to put away each month to meet my rather extravagant retirement income goal were rather depressing. However, you have to be realistic. Also remember that retirement is a 3-legged stool. The three legs are 1) Social Security Income 2) Retirement provided by your employer 3) Personal retirement savings. This plan only is for the third leg. Don't input the whole amount you will need as a monthly retirement income. First subtract what you think you will be getting from SS and then subtract you pension plan income. If you are not sure what these amounts are, contact your nearest social security office and you employee benefits office. What should we use for the inflation factor? While it is true that we saw double digit inflation a number of years ago, the average inflation from now until retirement will likely be much lower. Also keep in mind that during that time of 12% inflation, savings accounts were paying dividends as high as about 16%. Therefore as long as you use a reasonable average for both inflation and interest rates your plan will be fairly accurate even if the rates change. Another note: If, for some reason, you want to use a different interest rate on current funds than the rate for retirement funds (the bottom value on the screen) you may change the interest rate on current funds and it will change by itself. On the other hand, changing the last value on the screen will change them both.