Tap Your Computer’s Power to Develop Wealth-Building Insights - dummies

Tap Your Computer’s Power to Develop Wealth-Building Insights

By Stephen L. Nelson

This is hard to describe in general terms because by definition, what the computer lets you do is get very specific. Consider this: Personal financial planning is essentially applied mathematics. What that means is that to make a decision, you often need to tally up the costs and benefits of Option A versus Option B, and then you need to make time/value of money calculations.

(Practically speaking, this just means that you also need to figure in things like interest expense and investment income.) These sorts of tasks are the perfect applications for the personal computer.

When you use your computer to make better personal financial decisions, you develop powerful, wealth-building insights that often supply the rest of the money you need for your investing. More specifically, if you need to save $300 per month and you can get $150 of this from your employer and through tax savings, you still need to come up with that last $150 per month.

Your computer can, and should, help you find this money.

Here’s one example: Have you heard about early mortgage repayment? It sounds like a good idea, at least on the surface. If you add an extra $25 per month to the regular mortgage payment on a typical mortgage, you often save about $25,000 in interest. (Maybe more. How much you save depends on the interest rate, the mortgage balance, and the remaining number of payments.)

Based on that bit of financial data, early mortgage repayment sounds like a pretty good idea. Lots of people — encouraged by financial writers — have started doing this. But is it a good idea? It depends.

To determine whether this is truly a good idea, however, you need to weigh your options. If you can instead put an extra $25 a month into a 401(k), you end up with about $100,000.

So there you have it: Option A, which is early mortgage repayment, sounds pretty good because $25,000 of interest savings is a lot of money. But Option B, the 401(k) option, is clearly better because, for no extra pain or hassle, you end up with $100,000.

But other important financial decisions and personal financial planning issues often provide you with similar opportunities for free money or extra wealth because you use your computer:

  • ARMs: Sometimes, adjustable-rate mortgages (ARMs) actually make you bear less risk and work better.

  • Buying a home: Sometimes this isn’t a good investment — even when it seems like it is.

  • Car leases: They can be great deals or terrible deals. It all depends on the implicit interest rate that the lease charges.

The Internet also provides a ton of tools, many helpful, for doing personal financial planning. Use these sorts of computer-based financial tools to make wiser decisions. A little extra money here, a little there —and pretty soon, you’ve found that last bit of money you need to save for a comfortable retirement. No kidding.