Time Value Of Money IV...Continued

PV:  Present Value:  The value of a dollar today due in the future or in a series of payments, to give an investor a certain yield over a period of time.   

%i:  Yield:  This term is often interchanged with rate of return or interest. 

PMT:  Amount of payments:  The amount of dollars received or paid out in periodic payments to achieve a certain rate of return, and to amortize a loan.

In last month's issue, we discussed how N relates yield. Go to the EDUCATION section where you will find some practical applications to use to maximize your yield, and avoid traps. If you missed last month's issue, you can go to the archives section and review. In this month's issue we are going to examine the relationship between N and PV.

You have heard it said, "The sooner the better." This applies to the relationship of N to PV. When you decrease N, you will increase PV. In other words, there is an inverse relationship between N and PV. Remember this, it will make you wealthy. Let's look at a typical note to understand a real life application to this principle. Here we have a $10,000 note paid over 30 years @ 12% interest with payments of $102.86 monthly. Here is what the note would look like.

If you do not know how these figures were achieved, go to "How to Discount Even Cash Flows" and "How Discount a Series of Payments and Balloon."

What is the first thing you notice? Is it that with only a $20 monthly increase, the time needed to payoff the loan has been reduced from 30 years to 15 years? In the articles "How to Bust Balloons", "75% Yield" are two practical, wealth building applications of using the axiom that N and PMT have an inverse relationship. Knowing how to apply this concept will lead you on the road to what I call "getting rich slow" technique.

We have all heard of that if you increase your monthly payments, you will decrease the amount of time it takes to satisfy a loan. You have now seen a mathematical example of this concept. This is because of the inverse relationship of N to PMT. The higher the payment, the lower amount of time it takes to pay off a loan. Conversely, the longer it takes to pay off a loan, the lower the payment. Depending on your goals is how you would structure your note. If you want fast equity, make the payments higher. If you want cash flow, make the payments lower. This is the marvel of dealing in owner financed notes. You can structure them to suit your needs, not the bank's. Can you have both? Sure you can. In the EDUCATION SECTION there are a couple of techniques that will show you exactly how to increase your equity, and at the same time have your payments low.

For those are beginning to catch on to the concept of time value of money, are you asking the question how this will affect the value of a note? Good!!! The article "Increase Your Yield by Lowering the Interest" shows a step by step method of applying what you have just learn to make your note more valuable, and to put more money in your pocket. Unlike the Hokey Pokey, I believe this is what it is all about.

In next month's issue, The Professor will discuss the relationship of N to PV.

Big,Big Bucks here!!! In the meantime, I want to wish you a Happy HOLIDAY!!!! (If only I could develop a Time Value of Calories formula)

Send your comments or questions. It is from your feed back that I get topics for the discussions. Simply click here.