Everyone can not get out of money. If you’re short on cash (free cash flow) will seek loans with interest, the ease to the needs and desires to obtain the maximum.

Meanwhile, those who have more money (excess liquidity) are looking for an alternative investment option with the greatest return. Financial mathematics taught as a financial expert and as a cash deficit and a cash surplus.

To check if you are wiser than cash deficit, are a recent example and simple operation. For example, a rural bank has only approved the request for your credit RP100 million. RB, which offers two options for repayment, debt repayment is RP10 million per month for 12 months beginning one month or to pay Rp120 million again exactly one year.

Except for a difference in pay and the other at the same time, passing both alternatives of the same light and heavy, because the amount of interest actually paid the same RP20 million and the completion time, the same as for a another year. What alternatives do you choose?

apparently more people were choosing to pay the settlement alternatives, including those who had studied accounting and finance. When asked the reason, those who say that pay well in the back feels hard to choose to pay or worry about money not collected.

Others say, relatively easy to move over and over will be paid at the rate of RP10 million, is still within the limits of their financial capacity of millions of euro, while at the same time out of their reach Rp120 and do not believe the money can be prepared to be disciplined. The answers that make sense, right?

The problem is that the science used by financial reasons have no basis and should include not only because it is more like it, feel lighter, more confident and sure. Would not it feel lighter just a matter of perception, because other people might actually feel more weight when it starts next month, willing to pay in installments?

The effective interest rate

Those who are financially expert decisions on the issue of computer-based or Excel, not on subjective perceptions. If you find yourself saying a calculator or computer, in addition to paying a better alternative because the interest rate is lower than the alternative is selected.

Now we try to ensure the effective interest rate or to calculate. For the payment of Rp120 million per year, including interest rate clearly and unambiguously by 20 percent.

This rate is the interest rate or the actual effective tax rates due to debt pay Rp120 million RP100 million in one year so that the interest rate RP20 million/Rp100 million = 20 percent. Pay for the alternative payment in installments, the interest rate of say 20 per cent per annum is also true because a large amount of interest for a total debt of RP100 RP20 million paid.

The problem starts much faster than the deadline for payment is next month, then one of the following month and so on. pay in terms of financial science, must start for another month and every month, is directed to the felt heavy.

The interest rate of 20 percent in the rate of alternative is called a fixed rate. If we are to the effective interest rate of this alternative calculation, we get a higher rate of about 2.92 percent per month, or 35.1 per cent pa

Well, if initially perceived more easily demonstrated fact that, even annoying. Pay 2.92 percent per month may be obtained using a scientific calculator and method of trial and error, financial calculator or Excel.

If I were asked to solve the above problem, I will be with a financial calculator or Excel. However, students in classes of financial mathematics, I also used and are usually able to answer it with a scientific calculator.

Repayment of High Yield

My experience in this case, explained in various classes and presentations, the participants have not yet been able to accept financial logic of this. Contrary to popular belief, it turned out to repay the debt. They fail to understand why alternative interest rate higher or alias destructive refunded.

For them, I asked: “If you save RP10 million per month for 12 months if the money would be more or Rp120 million to Rp120 million?” Everyone agrees that the amount of the savings are greater than Rp120 million.

Well, I said, ‘If you should not use the time of repayment options and money you originally pay this debt now take the savings included.

After 12 months you will save more than Rp120 million, but just take to Rp120 million debt to pay, the rest still belong to you. “

In other words, pay Rp 10 million per month if the calculated value is greater for a further year as Rp120 million, the two payment options can be simplified to Rp 10 million per month that the value of more than Rp120 million a year earlier to pay Rp120 millions a year.

“The more clearly now, which is more easily?” Father, who appeared earlier and asked nodded. I hope that my explanation did not make him more confused. In practice, the financial world, banks are not only the tricks. If you buy a motorcycle, cars, computers, mobile phones or electronic devices, the first installment to be paid on the date of the transaction, together with progress.

In fact, the rates paid in advance of that money is good, so that progress had total, the price difference with the amount of cash advances. In addition, purchasers of goods on credit, often think that just about zero percent interest credit because financial literacy is not particularly a financial expert.

They also did not understand when shopping for any loan is a significant discount. It ‘unfortunate if the financial logic is not taught in schools of finance and accounting, both undergraduate and graduate levels.

Admittedly, the science of money and tricks and traps of this calculation is given in high school. By the way, you choose to pay Rp120 million per year, once again, right? If so, then you are a financial expert as a cash deficit.