 Personal finance practice problem using OneNote, saving for down payment on a home. Get ready to get financially fit by practicing personal finance. OneNote, you're not required to, but if you have access to and would like to follow along or in the icon on the left-hand side, practice problems tab down in the 7100, saving for down payment on a home tab. Also take a look at the Immersive Reader Tool. The practice problems will be in the text area too. Same name, same number, but with transcripts. Transcripts that can be translated into multiple languages and either listened to or read in them. We've got the information up top. We'll go through some of the calculations on down below. When we go through the planning for a home purchase process, there's a couple scenarios or a couple angles that we might look at the process through. The first and most obvious process would be, we're gonna take a look at the homes and the area we would like to purchase, look at the cost of the homes there, determine how much is a required down payment in general, determine how much financing would be necessary and go from there. Another method that we might use in conjunction as well would be to think how much money could I put away at this point in time to get to a down payment after a certain point in time and then think about with that down payment, how much house could I purchase given the fact that usually there's gonna be a required down payment to determine how much home I can purchase and then think about the financing from there. We can also take a look at this from the perspective of the bank and determine based on, in essence, our gross income, how much financing the bank would be likely to provide us with. So those are a couple different lenses that we can look through it from. Here, we're gonna start thinking about if I could put away so much money per year, then how much would I have after a certain timeframe in terms of a down payment and we will go from there. So we've got, we're gonna say the years to purchase, we're gonna say in six years, we would like to purchase the home. We're gonna say that we could put the 7,500 into savings during that time on a yearly basis. So we got an annuity type of calculation. The rate of return is going to be the 6%. So we could determine what the future value would then be after the six years based on that information being the down payment at that point in time. We could then use that to try to figure out possibly how much home we could purchase and how much financing might be necessary. So we could do our future value calculation. Where would we stand after the six years? You could do this in Excel, Excel type of calculation. It would look something like this, negative future value. We would pick the rate. Notice I'm putting the rate here on an annual rate. So we're gonna use the 6% on an annual rate. And then I'm gonna say, comma, the number of periods is gonna be six. And we're doing this in years. So it's gonna be six years. And then comma the payment because it is a payment. It's an annuity payment. So we're using the payment instead of the present value. And that is gonna be the 7,500. And that gets us to a future value at the end of the six years. How much we can put down the down payment if we're purchasing a home after that six years of the 52,315. We can see that calculation again if we do a little table on it, which I always think is a useful tool in part because it allows us to visualize the earnings and get a better visual understanding. And it's also useful to understand how these annuity calculations are working in terms of what the beginning point is that we're doing the calculation from. So in other words, if we're talking about period one, we're saying the amounts going in at the end of the period is the general assumption. So no income would be generated from it at that point. And then if I take a look at period two, now we've got the 7,500 investment and we earned income from the 7,500 in the prior period, which is 7,500 times the 0.06. That's the 450 plus the 7,500 that we're putting in this time plus the prior amount, 7,500. There's the 15,450. That 15,450 times 0.06 would give us the 927 of income if we were able to generate 6% income. Plus we put in another 7,500. Plus the prior balance was the 15,450. That's gonna give us our 23,877. Taking that times the 0.06 would give us income of about 1,433. Plus we put in another 7,500. And the prior balance was the 23,877. There's the 32,810. And then we'll do it a couple more times. Times the 0.06. That gives us our 1,969 about plus the 7,500 plus the 32,810. There's the 42. And finally, we're gonna take that times the 0.06. There's the 25,37 about plus the 7,500 plus the 42,278 gets us to the 52,315 that we would have at the end of the six years, possibly able to put that on a down payment. You can also do that calculation just to practice our present value because these are our financial tools. You can also think about it this way. What if I did six periods of one? And this will help you if, for example, you wanted to get more complicated and say your rate of return differs from year to year or something like that. I could look at the cash flow each year. Period one is gonna be the 7,500. And I'm gonna have that then for the five more periods. So the formula would look something like this. I'm gonna have the future value of the rate, which would be the 6%. It's a yearly number of periods. Notice it's a kind of tricky calculation. I'm gonna take the six over here minus the one and put this first one as an absolute reference so that it will then, I'll be able to copy that down. So it comes out to five. And then comma, comma, because I'm not gonna use the payment, this is present value of one. So in other words, if I took that 7,500 itself and to the end of the period, the end of the six years, it would be at the 10,337. If the 7,500 we put in in year two, similar formula, we're gonna say the rate is gonna be that 6%. The number of periods is now this six minus the two, which is gonna be four, and then comma, comma for the present value, which is the 7,500 gets us to the 9,469. The third year, 7,500 will be at the 8,933, the fifth year, 7,500, the eight, four, seven, two, seven. The fifth year, 7,500 will be at the 7,950. Sorry about that. And note, of course, as you can see here, the first one that we put in, because we put it in earlier because of the time value of money had more time to grow. So I think that's a useful way to be able to see it so that you can see that if you put the money in sooner, then it's gonna grow sooner, right? And that's gonna get us to the same if we sum this up, the 52,315, the 52,315. So then if we get that down payment, so now we can think about how much home we can purchase because I could say, well, if I then had the 52,315, and I expect that the down payment is the 20% that is necessary, we can be purchasing home valued at around the 261,574. So in other words, if I took this 52,315, that's how much I had cash divided by 20% down payment, point two, because that's the average down payment that could change depending on the type of loan that you got. You've got, if you got some other kind of loan formats, you could have a different down payment. But if I took the standard 20, that means I can basically buy the home for the 261,574 and then put it down the 20% down payment if I could get the financing for the difference which would depend in part on basically the bank of course and my credit score and my income and so on, which we'll take a look at in future presentations. Let's put this in the normal calculation so we can see how it fits together. So if I had the home price of the 261,574 and then I had the down payment of the 20%, that means the down payment would be that 52. In other words, if I did this normally, I would say, okay, if I bought a home for the 261,574 and I had to put 20% down, hold on a second, 261,574 times point two, that would be the 52,315. And that means we would have to finance if the comb cost 261,574 minus the 52,315 about the 209,260, it's rounded here because we took off the pennies. So notice you can do this in Excel, you don't need to do like these two calculations, although it's kind of nice to see them. But now if I set this up and I just adjust this data up top, then I can use this to say, well, what if I put in 8,000 and I can get my future value calculation and I can also then have this populate out so I can see how much home I could purchase and how much finance is going to be needed. And I can put together a nice little Excel sheet and try to project out and then I can change things like, well, what if I changed the number of years? If I changed the number of years, it's gonna have a problem with these tables, but this calculation will not have a problem with it. And then I can change the amount that I'm gonna save and I can change of course the rate of return that I'm going to be getting and I can adjust those factors and have a worksheet that I can play with and see how much home I might be able to get after so many years and so on, which could be fun as well as possible, possibly useful for our planning process. Once we have that, if I knew how much we're going to finance, then of course we can go through our standard loan calculation at that point. So if I said the rate is the 6%, I'm using that same rate, but it might be different for the loan. So I'm using the same rate we had for the growth rate, but it might be different for the loan, but I'll just use that. And then 30 year and the payment is the one, two, five, five. Now at this point, you might use the tools online. You might go into your online calculation tool and say I'm gonna type into Google loan calculator and get some kind of loan calculator and that's fine, but I think the tool is somewhat limited. You could just put in then the 261574. So 261574, this is gonna be a 30 year. We put the 6% and calculate it. It's gonna be then the payment of the 156827. And so we've got the, that's different than what I got. Hold on a second. That's because the amount financed is only the 209, 260, 209, 260. That's the home price. So 209, 260 and then do it. So now I got the one, two, five, four, 62. I think that's right. So we got one, two, five, five, rounded up. That looks good. So then we could do our amortization table, which I won't go into detail cause we saw it in the past. You could do this here or in Excel and you could do it online by just clicking the amortization table, which is great. But you can't really run scenarios as easily. The amortization table breaking out the payments, the interest, the loan decrease, the loan balance, but it does it on a month by month basis. It's useful to break it out on a year by year basis, something like this, which we can do in Excel, which we cannot do as easily over here with the online tools. And that's why I highly recommend put it into Excel. Cause notice if you did this in Excel and you put all this together, then you can change this amortization table. You can change the breakout on a year by year basis all based on this first number. Whereas if you're jumping from Excel to other tools, then you could do, you'd have to do this part kind of in Excel. And then if you're doing this, you'd have to do this in Excel. And then you'd have to basically do this in Excel. And then this part, once you get to that loan number, then you can jump over basically into the online tool and do your loan calculation. And then once you get the loan calculation, you'd have to jump back over into an Excel possibly to break it out on a year by year basis. And then you can take this information and start to think about what's gonna be the impact for taxes and so on. And what will your budget look like? Can you afford it, right? You could start to project your income statement from this information going forward. If you could do it all in Excel, then you can vary and run different scenarios much more easily. So this of course will break this information out payment by payment. You could also take this information from this table and start to think about what the tax implications might be based on this interest, which can get complex because you'd want to look at software to figure that out. We've got the loan decrease and that represents all the payments that we had here through the first year. That's gonna have an impact on the equity in the home which is the difference between the loan balance and the home value. And there's two things that we could think of that has an impact on that. One, us paying down the principle of the loan which is gonna, if I pay down the principle of the loan we're gonna have an increase in the gap between the value of the home and the loan value even if the value of the home doesn't go, doesn't change. And we're hoping the value of the home goes up. That would be the other thing that would show that difference. And then we've got the loan balance which is where our loan will stand at the end of the year which again will help us with an equity calculation to think about where we stand. And we can see how these things change on a year by year basis as opposed to on a month by month basis. And notice of course the interest in the loan decrease will change, will have differences on a year by year breaking out 30 years. That's a lot easier to look at than this. The amortization table, it's a lot easier to look at than this. The online amortization table and if we did it in Excel we can use that to draw from to figure out our budgets from there. We can tie our budgets to this number and that'll help us to then just change a few numbers to then do our adjustments. I can just change these three variables and have everything then populate based on that which is just, it's super fun and helpful. So we do this in Excel if you wanna check it out. We also do it in a pivot table format. So you can use your pivot tables as well to break this out pretty easily or you can use formulas. We do both of them in our practice problems. And so this would be a way that if you're thinking, well I wanna buy a home in five years or something you could look at the current home prices and so on and then you might start to think, well how much could I put away at this point in time? How much would it take to get to the down payment? You might have a down payment that you want to get to for example that's kind of like your goal and then you could start to play with this to figure out how much you would need to save to get to there, what the interest rate would be and then you could put the whole thing together so that it spits out everything down to here to your amortization, your breakout buy period and then you can even take it from there and figure out if that would fit within your budget and so on and possibly the savings that you would have on the interest for taxes which you wanna put some detail into that cause that could be a little bit confusing. So we do this in Excel if you wanna check that out there.