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In a recent webinar, I had my friends from In A Day Development give a presentation on some Time Value of Money calculations with their cash flow calculator. I received a lot of positive responses from that webinar. It’s surprising that investing just a few thousand dollars each year can have a staggering impact on your net worth over the long term.
Not good at math? Don’t worry…the 10bii, or cash flow calculator, is relatively easy to use and does not require a PhD in calculus in order to fully understand it. (If it did, I wouldn’t be in real estate.)
In this article, I am going to discuss how to use the cash flow calculator to estimate your return on investment (ROI), your expected payments, and the future value of your investments.
First, let’s take a look at the calculator’s function keys (shown from left to right on the calculator)
Keep in mind that when you’re using this calculator, money spent (such as payments or investments made) will show as a negative number, and money earned (such as payments or lump sums received) will show as a positive number.
Let’s do a few simple problems that will show how easy it is to use this calculator.
Cash Flow Calculator Example #1
You are 30 years old and have zero net worth, but you are looking to start building your self-directed IRA by investing the current maximum of $5,500 every year. You can get an 11% annual return on your money, and you are able to reinvest (compound) your cash flow once a year. How much will your self-directed IRA be worth when you are 60?
As you can see, investing $5,500 every year has exponential benefits down the road. If you are able to invest every year and keep the money invested at 11%, your portfolio’s value will be more than $1,000,000 by the time you are 60.
Let’s use the cash flow calculator to complete a more complicated question…
Cash Flow Calculator Example #2
You have a real estate note that you are thinking about purchasing inside your self-directed Roth IRA. The note is on sale for $45,200 and will pay $230.00 per month for 5 years. At the end of this term, you’ll receive a balloon payment of $55,000. How much would you be willing to pay for the note if you needed to get a 12% return on investment? (Interest will be compounded monthly.)
In this example, to attain your 12% annual return, you would have to ask the note seller to reduce his current purchase price by $4,585.62. Based on the note opportunities that I have seen, this is not far fetched at all. In fact, depending on the seller’s situation, you might be able to negotiate an even better purchase price.
Cash Flow Calculator Example #3(a)
You have a college education trust for your son that holds $50,000 in cash at the time he starts college. The trust’s funds are invested at 12.5%, compounded annually, and his annual tuition costs are $10,000, after scholarships. How much will the trust be valued at when he graduates 4 years later?
As you can see, you are spending $40,000 on college tuition, but because you are invested at 12.5%, the net worth of the trust is only $20,000 less than it was when your son started college.
Cash Flow Calculator Example #3(b)
What would the trust be valued at if it held $100,000 when he started college?
As you can see, if you started with $100,000, the net worth of the trust will actually increase during the time your son is in college. This is one of the many reasons it is important to invest now and spend later. The faster you can increase your net worth, the more likely you will be able to pay off your expenses without taking principle reductions.
Any seasoned real estate investor will tell you, the financial calculator is the most crucial tool in an investor’s toolbox. Refer back to these cash flow calculator examples as you learn to use the 10bii, and you will be well on your way to planning your financial future. If you enjoyed these cash flow calculator problems, check out my article “How To Use a Financial Calculator” for more examples that illustrate why you should invest now and spend later.