 Personal finance practice problem using OneNote. Savings from insurance discount calculation. Prepare to get financially fit by practicing personal finance. You're not required to, but if you have access to OneNote, would like to follow along. We're in the icon on the left-hand side. Practice problems tab in the 8080 savings from insurance discount calculation tab. Also take a look at the immersive reader tool or practice problems often in the text area too, with the same name, same number, but with transcripts. Transcripts can be translated into multiple languages either listened to or read in them. Information's on the left-hand side where it says that we have A and B who are considering ensuring their cars with the same company in exchange for a discount. So we're imagining that we have person A, person B, currently having two different companies for their car insurance, possibly getting a discount or offered a discount if they were to go with the same company currently at their different companies. Person A is paying 750, person B paying 950. The discount we're gonna say is a 15% discount. So first we wanna do our discount calculation and then we're gonna use that discount calculations as we've seen in the past, with past kind of discount calculations to kind of think about what the savings would be over a period of time. So we'll use our present value calculations when we get there using the interest rate, 7%, 10 years, and inflation 3.5. So let's first consider the savings calculation. So these are great problems, by the way, to do in Excel because you can practice setting up your Excel tables and putting together your worksheets and just noting or seeing in your mind how you might put these things together in a table format. So we've got the current cost. I'm gonna put a colon here to indicate it's gonna be a subcategory. We currently have A and B. I've indented A and B, 750 for A. That's the 950 for B. And so we've got the total current costs are gonna be the 1,700. We're gonna assume that they're gonna get a savings discount of 15% and therefore the discount is gonna be the 255 on the discount. So we can think about how much we would pay then that are currently paying 1,700. So if they got the discount of 255, we could say 1,700 minus the 255 and then we can get to the 1,445. Also note that whenever you're looking at this kind of discount, you could think of it as, okay, if I'm not gonna be paying the 15%, then I will be paying the difference. So if I take then 100 or one minus the 0.15, the 15%, let's do that one more time. Something funny happened. One minus the 0.15, that's gonna give us 85% that we are going to be paying. And if I multiply that times the 1,007, that means that's the amount that we would pay because we're not gonna be paying the 255. If I add the 255, that'll get us back to the 1,700. Now, if we took that savings and we said, all right, what if I did that? What if we got that over 10 years? What would be my savings over 10 years if we were to do this? And this would be a typical kind of strategy when you're talking about these kinds of discounts, talking to a salesperson, for example, or you're trying to figure out what the best decision-making would be for you possibly, you like your other insurance company, or there's some advantages to having both of them split up. So if you're kind of leaning towards the idea that the savings is a good idea, for example, you might be willing, you might be saying, well, what, you know, if I did that for multiple years, just imagine the money that would be saved, right? And you could say, if I multiply that times 10 years, then I'd have savings of 2,550, right? And you might go further than that. You might say, well, look, if I was to take that 2,250 dollars per year and invest it and get a return on it at 7% per year for seven years, then I could do my future value calculation and get to something like 3,523, which in Excel, we do do this in Excel, but the formula would look something like this. We're gonna take the future value, which would be the rate. So we're taking the rate, which is gonna be the 7%, comma, this number represents the number of periods, which we're just gonna imagine 10 years. We just kind of pull 10 years out. What if we did that for 10 years? And then comma, and then we've got the payment because it's basically annuity and annuity because we're saving the 255 each year, so that's of the 255. So that would give us to a future value of the 3,523. Now notice if you were basically arguing from the standpoint that you would want to do this, then your argument would probably be leaning towards this future value calculation. You'd be saying, well, how much money could we have in the future? But remember that 3,523 is in basically future dollar terms. So if you're trying to measure both sides of the argument, you gotta kind of keep that in mind. You could do like a present value calculation and you could say, yeah, but really what I'm gonna do is be spending possibly the 255. And let me think about what the present value calculation of that future stream of income would be at that 7%, which I'm gonna assume is basically the discount rate. So now I can say, okay, I'm not gonna be looking for future value terms. We're looking at annuity of the 255 and I'm gonna discount it back to present value terminology. And so you could say that that would be the formula looking like this, which would be the rate. I'm gonna be using that 7% as the discount rate, comma, number of periods. The number of periods is going to be the 10 because we're gonna assume it for 10 years again and then comma, it's gonna be a payment, which will be the annuity payment of the 255 again. And that would get us to a lower number. So if you're a pessimist about this kind of thing and you're saying, I don't know if it's worthwhile to do it, you might say, well, let me discount that future stream of income flow to what I think the present value is and you get the lowest number of the 1,791. And or you could basically present value instead of using the interest rate that you could get if you were able to invest that money, you might say, well, what would just the purchasing power be on the money, meaning the money that I'm saving in the future possibly would be declining due to the purchasing power of the dollar. And I'm gonna say the inflation is at the 3.5%. So now we could say, okay, if I take that stream of present value at the 3.5%, we could take like the rate the rate would be now the 3.5%, comma, number of periods is gonna be 10 still. And then the payment is gonna be the 255 of the 2,121. What is the point? So the point of this is just to note that you could, you might have a savings policy or you might have to be able to get some savings if you were to group insurance policies together. You can think about what that discount would be, whether it's worthwhile to go through the hassle of do that. And then you also just wanna think about when you talk to people like salespeople or anybody who's trying to convince you one way or the other, or if you're trying to put together an argument one way or the other, there's more than one way that you can kind of look at these future value, present value kind of calculations. Notice that this whole concept is kind of true, but somewhat arbitrary, right? We could say, well, if you save 255 for 10 years, you'd have 252,550. And if you took into consideration the fact that you could put that money away and earn, let's just say 7%, over 10 years, you'd have $3,523. However, that's true, but that $3,523 is in future value terms, they're not really present value. So you could argue the other side of things. You could say, well, if I discounted back that future stream of money, that 255 discounted it to the present period, saving that amount because the future amounts that I'm going to be receiving at 255 are actually less valuable than the current. You could say, well, I'm good. I really think the present value is 1,791 instead of this 3,523 or the 2,555, or you could use something like an inflation rate, for example, instead of the 7% discount, you could say, well, the purchasing power of the dollar is going down, I'm probably gonna spend the money, the purchasing power of the dollar is going to be decreasing so I can purchase less stuff in the future with the same money at, let's say, anywhere between one and three to 4%, it's kind of like an inflation, they try to shoot for one to two to three, but it could go higher than that if they get out of control on the Fed. And then you could say, well, the present value is more like the 2,121. So when you get into kind of debates on these kind of numbers, remember, these are speculatory types of numbers and you could talk about future value terms and present value terms, we've got to wrap our mind around what these concepts mean. These are great practice problems to do in Excel to practice our tables and practice our kind of future value and present value calculations.