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Tuesday, April 17, 2012

Newtons Laws of Finance

Sir Isaac Newton's 3 law of motion explain far more than simple inertia or physics. The laws of motion serve as a crucial basis to understand the complexities of personal finance. With out a simple understand of Newton's laws of motion; getting in financial shape will be an awkward and unsuccessful battle.

" Objects in motion, stay in motion- unless external force is applied"

Imagine the object in motion, being your personal expenses. Your expenses have no intuitive knowledge of your leisure schedule. If you go on holidays, your expenses will remain constant. If you go on holidays, the interest rate on your credit card statement will remain constant. The interest fee; will be added to your expenses. The longer your bills stay in motion the greater interest you will be charged. (Or the more you save; the greater interest earning you will receive.)

Keep you finances in motion, by paying of your debts each month in full. Doing so will eliminate nasty interest expenses. Keep your cash flow positive, by budgeting your earnings against your expenses. Simple?

"The force of an object is the combination of its mass, and acceleration"

Credit cards are greedy interest vampires. The average credit card company will charge an annual interest rate of 13-20% per year compounded monthly.

Say you owe $1000 on your credit card and the interest rate is 13%.
The effective annual interest rate on your card would be 13.8%.  (ear)= 1 + (rate/ periods)^periods-1
 EAR= 1+ (.13/12)^12-1

If you don't pay of your credit card bill, you will be charged interest on top of interest and your total pill will increase proportionately. At 13.8% interest the credit card company will be making $138, from you for every grand you owe. Interest debt can accumulate at lightning speed. To change the direction of your compounding expenses pay of your cards every month.

( If you open a saving account and deposits $20 in it every week for a year at a 6% EAR your measly contribution of $20 a month will grow to $1395.40 in 5 years. The interest will accrue and you will make money on your savings.

"For every action, there is an equal and opposite reaction" 

For a shopping spree on rodeo drive, you need dollar bills. You can't spend money if you don't have money. The opposite action of spending money, is earning money. Before you increase expenses examine way to increase your revenue.

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