How to use the main tool for Note investing.
Today I’ll go over how to use a Financial Calculator for investing in Notes for your Self Directed IRA. The one I use and like is the HP 10BII like this one. In this post I’ll show you how to calculate a straight payment for a note and also how to figure out Yield for a Note you buy at a discount.
It’s quite easy to learn since there are really 5 keys you need to memorize. However for this post I’ll go over the main 4 and leave the 5th for another day. Once you have those down there is no limit to the amount of money this machine will help you make on your future transactions. Please keep in mind all the key sequences I’ll go over work on the HP 10BII, I’m not sure about others except that the 5 basic keys will be on every financial calculator. If you don’t have the 10BII either get one or read the manual that came with the calculator you have.
The Keys you need to learn are on the top row and labeled N, I/YR, PV, PMT, FV.
N is the number of periods that you are going to calculate for in easy terms it’s for Months.
I/YR is interest
PV is for Present Value or the amount of the Note.
PMTis for the payment / month. Entered in as a negative.
FV is for Future Value….I’ll cover this in another post.
Since we now know what the keys mean all you have to really do is enter in 3 and solve for the last one. Some examples will help explain better.
Remember, I’m no math phd. and I hated “Story Problems” in school too, but I can do this and so can you. I’ll bet though if the story problems in my school would have been about making money instead of how fast the car is going I would have paid more attention. Story Problems that involve making money are very interesting to me now.
Before we begin make sure that your calculator is set up to figure out a monthly payment. To do that turn it on and press 12 then the orange key then the PMT key.
Here’s a simple example.
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Note: 10,000 ( Key in 10,000 then press PV)
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Term: 60 months (Key in 60 and then press N)
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Interest: 12% (Key in 12 and then press I/YR )
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Payment: ????? ( now just press PMT)
The Result: is 222.44 per month. Congratulations you just figured out what the monthly payment would be for a 10,000 Loan or Note for the above terms. Notes are simply that easy. This is one way to find Notes, is to create them. The next time someone you know & trust needs to borrow some money you can now figure out the math to write on the a Promissory Note you either buy, or write up your self. I would suggest that if you do, do that and create your own Note you that you secure it with some type of collateral that the borrower wants to keep and get back.
Now that you can figure a Payment, try adjusting the Interest Rate to 20% and then Solve for Payment.
1. Key in 20 and press I/YR
2. Press PMT and you get 264.94
Go back to the original example by entering in 12 into I/YR, and change the Months to 15 to see what happens to the payment.
1. Key in 15 and press N
2. Press PMT and your result is 721.24
Now you’ve see where once you enter in the 4 values you can change 1 and solve for another without having to enter in everything every time. It saves you time and you can quickly see what different values can do for different scenarios. That can be helpful when you are evaluating a Note to Buy.
For the next example I’ll get a little more complicated and show you how to figure out Yield. Yield as I describe in another post, is your ROI or Return On Investment expressed in %. We’ll use the same terms as above however we’re now BUYING the NOTE from someone else who needs to sell it.
Let’s say we negotiate a good price for the Note because they have 5,000 in Credit Card debt they want to pay off, we offer 5,000 and they take it. You already have the above example keyed in and see 222.44 for the Monthly payment. You only have to now enter in the price you are going to PAY for the 10,000 Note into the PV and solve for I/YR.
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Note: 10,000 ( Key in 5,000 then press PV)
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Term: 60 months
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Interest: ??? (Now Press I/YR, This is going to be your ROI)
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Payment: 222.44
Result: you get 48.41 % that’s going to be your Yield or ROI. It’s going to be hard to top that Yield in the stock market or any market for that matter!
If you don’t think you’ll be able to find ones like this go more conservative and enter in 8,000 in PV and you will get 22.33% for your Yield. If you understand the Value of what the 10,000 is secured by you can then become a shrewd investor offering what you think is the best deal for the risk you understand. These are the basics of using a Financial Calculator and in a future post I’ll write about how to Calculate Future Value or FV.
If you do this type of investing in your Self Directed IRA, as I do, it will no doubt grow. With compound interest it can grow faster, and if you use a ROTH IRA your harvest will be TAX FREE! For me that’s what it’s all about!
Will
August 10th, 2007 at 8:46 am
[…] Today I’ll go over how to use a Financial Calculator for investing in Notes for your Self Directed IRA. The one I use and like is the HP 10BII like this one. In this post I’ll show you how to calculate a straight payment for a note and also… …more […]
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