Saving

How to Use an Interest Calculator

An Interest Calculator is one that is used by individuals or firms within the financial sector to determine the amount of interest that will be accrued by a person or firm or business to whom they are extending credit in any form.

The Interest Calculator exists in a number of forms. It can be a document with a formula that is embedded within a spreadsheet document like what Microsoft Excel offers; an Interest Calculator can also exist as a web-page, as in the case where financial firms create web-pages that have the interest calculator embedded within them. This assists prospective clients to use these pages to find out what interest they may incur if they decide to use the financial services belonging to that provider.

The Interest Calculator can also be the actual device used to process this interest figure, and in this case, we are talking about a calculator as a mechanical device.

An Interest Calculator can also exist as a written formula, one that is simply worked out mathematically, on paper.

Interest Calculators typically cover two forms of interest: simple interest and compound interest.

In the case of a mechanical device, it can be programmed to work out the different types of interest, that is, simple and compound interest.

In the case of embedded formula based documents like Microsoft Excel spreadsheets or even web-pages with embedded formula, variations can be made for calculating both simple and compound interest as well.

The same variation can occur when it is calculated as a mathematical formula: you can have a mathematical formula for simple interest and a variation of the same for compound interest.

Simple interest involves calculations involving three basic variables: the principal, the time period and the rate of interest for that specific block of time.

Compound interest rates take into account several factors. These include the principle, the rate of interest over a specific period of time, and the time period involved; however, it also includes an important variation: the rate at which the interest amount paid changes over the varying principal over time.

Some compound interest calculations incorporate an allowance for fluctuations like inflation rates as well as bank rates, insurance premiums and things that affect the returns the financial institution gets from the transaction. Compound interest rates can also take into account penalties for early payments or even late payments, as determined by calculations stipulated by the financial institution.

Interest calculators will thus obviously vary in the situations they are used. Simple interest calculations best serve one off payments and are rarely used for the complicated and more long term financial arrangements. Simple interest rates cover calculations or transactions that are usually more informal in nature.

Compound interest rate calculations are more typical of formal business arrangements that are found in insurance firms, banks, credit card companies, mutual fund managers as well as saving scheme firms.

Banks vs. Credit Unions

Before starting a savings account, making investments, and making your own financial plan, you have one choice to make. Should you put your trust in a bank or a credit union? From the outside, the two financial institutions appear the same. What you do not know, however, could be the difference between becoming a member of a local bank or the local credit union.

Charles Funk, president and chief executive officer of MidWestOne Bank in Iowa City, Iowa delves into the subject.

“From the outside, banks and credit unions look basically the same,” Funk says of the two financial institutions. However, there is one distinct difference. Credit unions were created with the goal and mission to serve the under served. Taking a quick look at how credit unions have grown into a large brand shows how the original goal has been strayed from.

Banks have common stock and shareholders, whereas credit unions have members instead of shareholders. This also means that, unlike banks, credit unions do not pay income taxes. This allows them to use more of the money the collect for profit.

Banks and credit unions both offer similar services, from checking to savings accounts but how they operate on the inside is not as similar as the outside appears.

When it comes down to it, the choice between using a bank or credit union is up to the student. The thing to remember is to check all available options and find the one that works best for you.

What is a Target Date Fund?

There are a ton of investment vehicles on the market, most mutual fund companies now offer what is called a “Target Dated Fund”. Investors looking for a fund where they can invest for retirement and don’t have to worry about asset allocation will find target dated funds a perfect fit.
Target Date Funds
Target dated funds are mutual funds that are actively managed with a long term goal in mind. For example: The investor has a retirement date in mind, lets say 20 years from now. All they have to do is find a mutual fund with a target date that fits their criteria, make the investment into the fund and that’s it.

When Should You Use These Types Of Funds?

Investing in these types of mutual funds are for people who want to invest and forget. Lets use the example above: An investor has a retirement date which is 20 years from now. The risk profile for a person this far from retirement is still in the high risk category. This means the mutual fund manger will allocate the assets of this fund in investments that focus on higher capital returns, not capital preservation.

So, the fund will be invested more in stocks and less in bonds. The goal, since there is a long time frame for the investment, is to be aggressive, accumulate more capital. Then, as the fund matures the fund manager will make shifts in the asset allocation moving toward a more conservative mix of stocks and bonds.

Ultimately, as the fund closes in on the target date the asset allocation will be mostly in investments focused on capital preservation. So, for the investor who has a long term time frame for retirement and wants a passive investment, this can be the perfect investment vehicle.

Pros

Mutual funds are always diversified, this investment is no different. Target dated funds are generally comprised of a mixture of other funds. So, this means you have diversification within diversification, this lowers the investors downside risk.

The other advantage, which was already touched on, is an investment where the investor is pretty much hands off. The mutual fund manager is navigating the asset allocation in these funds. The investor is only choosing the target date, that’s all.

Cons

The downside of these target dated funds are fees. Since these funds are actively managed the fees can be much higher compared to other mutual funds. The other term that designates fees in a mutual fund is call “expense ratio”.

The last thing that can be a negative factor with these types of funds is the investments themselves. As mentioned, the fund manger chooses the blend of investments in the fund. Some target dated funds only invest within their own fund family. For example: A fidelity targeted fund will only invest in other fidelity mutual funds (this is only an example, fidelity may not do this,) in this case the investor can lose some of the safety factors that come with diversifying among a variety of mutual fund companies.

Overall, target dated funds can be the perfect investment vehicle for someone with a long term investment timeline who doesn’t want to worry about market fluctuations.