 # Periodic Payment Tool For Personal Finance Calculations

The periodic payment calculator can be a useful tool in some key personal finance computations. For example, you can determine the monthly payment on a loan. You can also figure out how much you must contribute on average over a specific time period in order to reach a certain goal.

### Instructions

Make changes to the input fields above, and click “Calculate” to get your results.

#### Present Value:

The lump sum amount with which you are starting. So if you want to find the monthly payment of a loan, enter the face value of the loan as a positive in the present value field. In such a case, it is entered as a positive because you are receiving the loan proceeds at the outset.

On the other hand, if you want to figure out how much you must save and invest each quarter in order to turn say \$50,000 (present value) into \$800,000 (future value), you would enter the present value as a negative. Present value is entered as a negative in this case because it represents money you spent to invest in order to generate a future value. Annual Rate:

This can be an annual interest rate on a loan, or an average investment return of a portfolio, for example. The rate is adjusted automatically in the calculation when you choose the compounding frequency. For example, let’s say you enter 6% as the annual rate and “semi-annual” for the compounding frequency. In this case, a periodic rate of 3% (6% / 2) will be used in the calculation.

#### Number of Years:

The time period or time horizon, stated in years, which you want to use in your calculation. Similar to the “annual rate” above, this number is automatically adjusted in the calculation based on the compounding frequency selected. For example, let’s say you are computing the present value of a 30 year mortgage loan. You would enter 30 for the number of years. But the compounding periods used in the calculator will be 360 (30 x 12) if you choose “monthly” compounding,” which is the case with mortgage loans.

#### Future Value:

The lump sum amount which you will have at the end of a specified time period. As an example, if you’re looking to figure out how much you must invest each year (periodic payment) in order to save \$600,000 by retirement, you would enter this number as the future value.

On the other hand, if you are determining the monthly payment on a loan, this field (the future value) will generally be zero, since the loan will be fully amortized by the end of the loan term.

See the examples below for a better understanding.

#### Type of Payment:

This input specifies when the periodic payments are made. The default selection is that periodic payments are made at the end of each period (“in arrears”). However, you may choose to calculate the periodic payment assuming the payments are made at the beginning of each period (“in advance”).

#### Compounding Frequency:

The frequency with which returns and any periodic payments are added to the running balance on which the rate is applied. For example, with a bank savings account or a mortgage loan the interest compounds monthly. A stock dividend reinvestment plan, on the other hand would compound quarterly since most common stocks pay dividends every three months.

#### Periodic Payment Result:

The result of this calculator computes the amount of each periodic payment per compounding period selected. For example, if you chose monthly compounding, the result will be the payment for each month. If you chose quarterly compounding, the result will  be the payment (or total payments) for each three month period, and so on.

If the result is a negative, it indicates you would pay this amount. An example of this is a loan payment or a contribution to an investment account.

A positive amount would indicate you are receiving periodic payments. An example of this would be a withdrawal from a retirement account.

## Determining The Monthly Payment On A Loan

Let’s say you are getting ready to buy a home. You determine that you will need to borrow \$200,000 in order to make the purchase. Based on your good credit score, you figure you can get a 3.5% mortgage. You also want to keep payment on the low side, so you choose a 30 year loan term. Plug in the inputs as indicated below and you get a monthly payment of \$898.09. Again, the result comes out as a negative because this is the amount you will be paying each month.

### The inputs are as follows:

present value: \$200,000 (the face amount of the loan is entered as a positive since you are receiving the loan proceeds at the outset)

annual rate: 3.5% (this rate is automatically adjusted for the compounding period in the calculation)

number of years: 30 (term of the loan)

future value: \$0 (the loan balance will be zero (fully amortized) at the end of the term)

type of payment: “End of Period” (default) since mortgage payments are made at the end of the month

compounding frequency: Monthly (the mortgage loan interest is compounded monthly since this is the frequency of the mortgage payments)

You can perform a similar type of calculation for an auto or other type of loan as well.

## Figure Out How Much You Must Save To Meet A Goal

The payment calculator can also help you figure out how much you need to save and invest on average to reach a specific goal.

Let’s say you have \$60,000 in your investment account currently (present value). You want to accumulate a retirement nest egg of \$500,000 (future value) in 20 years. You also figure that you can invest contributions to your account and also reinvest any earnings every three months (quarterly compounding frequency). One final assumption is that you will be able to earn an average of 8% on your portfolio investments each year.

So you plug in the numbers into the calculator as indicated below, and you get \$-1,070.71. The result is a negative because this is the amount you will have to pay into your investment account every three months (compounding period).

### The inputs are as follows:

present value: \$-60,000 (the amount you have invested (entered as a negative) at the outset of the time period indicated)

annual rate: 8% (this rate is automatically adjusted for the compounding period in the calculation)

number of years: 20

future value: \$500,000 (enter this value as a positive since this is the value of assets you will have in the future)

type of payment: “End of Period” (default)  – we’ll assume investments (periodic payments) and reinvestments of portfolio earnings will be made at the end of each compounding period

compounding frequency: Quarterly (we assume investments and reinvestments will occur every three months)

## Conclusion

This calculator assumes fixed payments and rate input variables throughout the time horizon used. For something like a fixed rate mortgage, this is not an issue. But for predicting future savings goals and investment returns, it does not allow for more flexible and detailed analysis.

More detailed inputs can be helpful. For example, your asset mix can change as you get closer to retirement (may affect investment rate of return). Or your savings may change based on income or other factors.

But greater detail can also provide a false sense of accuracy. The future is impossible to predict for many variables. For example, you don’t know exactly how much you will be able to save each year, or how much your investments will earn.

Nevertheless, you can use this tool to perform basic finance calculations in an efficient manner.  Using estimated averages for the input variables can give you some useful ballpark figures.