How to calculate annual percentage growth.

There are a number of financial topics where it is useful to know the annual growth rate of an asset or cost. Lets say for example that I invested $1000 in a stock in 2003 and today in 2008 that the stock is worth $1300. How do I know the annual % growth of my investment?

This is what is called the Compound Annual Growth Rate (CAGR). The Investopedia article on CAGR tells us that the formula for CAGR is:


CAGR = ( Ending value / Starting value ) ^ (1 / # of years ) - 1

Note the ^ symbol there means that the first figure from (ending value / start value) is taken to the power of the second figure ( 1 / # years). If you are in Windows for example the built in calculator has a x^y button in the scientific view mode. Or you can also use the ^ symbol in a formula in Excel.

So lets figure the CAGR for my example. The figures are :
Ending value = $1300
Starting Value = $1000
# of years = 5 (2008 - 2003)

So the calculation would be:

CAGR = (1300/ 1000) ^ (1/5) -1
= 1.3 ^ 0.2 - 1
= 1.0538 - 1
= 0.0538
CAGR = 5.38%

OK lets apply this to another example. Lets say that in 1998 I bought a house for $160,000 and today in 2007 the house is worth $225,000. How much has my house appreciated in value per year?

CAGR = (225000/160000) ^ (1/9) - 1
= 1.40625  ^ 0.11111 -1
= 1.0386 -1
= 3.86%

You can also use the formula to find out how much % an asset has lost value. Lets say that my house peaked at a value of $240,000 in 2005 and then dropped to $225,000 in 2007. What is my annual rate?

CAGR = (225000/240000) ^ (1/2) -1
= - 0.03175
= -3.175%

How to save on gas #4 - using GasBuddy

I've been discussing ways to save on gasoline costs. Another way to save on gas is effective use of the GasBuddy.com website. GasBuddy is a collection of websites for each state and major city that shows recent gas prices for that area. The information is entered by users of the site and usually updated fairly frequently. Its a real handy site to quickly find the cheaper gas stations in your area.

To use GasBuddy:

1. Go to GasBuddy.com
2. Type your zip code into the search box and hit the Search Now button
3. This will bring up your local page with gas prices in your area. This information alone is pretty handy and if the cheapest station is close by or within your normal driving path then that's all you really need to do.
4. To find the cheapest station nearby or in your driving path the map option on GasBuddy is pretty handy, click on the 'Map Gas Prices' button in the menu at the top of the page.
5. This lands you on a map of the local region with as prices shown by location. To narrow the map to your side of town you can put your zip code in the search box on the map itself. Now you can visually see where the stations are and their prices.
   
6. Scan the map for your neighborhood or path to work, school and find the cheaper stations.
   

If I use Gasbuddy on my area I can quickly and easily see on the map that while there's a station with $3.65 gas right on my way to/from work but just 1 mile over there's a station selling gas for $3.55.

Give stock to charity and save money on taxes.

The idea for this topic was prompted by reading the article 'My Tax Mess' on Free Money Finance discussing his tax issue. FMF donated some mutual fund shares to a charity last year.

If you have an asset like a stock or mutual fund that has increased in value then it may save you some extra tax dollars to donate that asset to a charity instead of giving the charity cash.

Lets look at an example. Lets say you routinely give $1000 a year to your favorite charity and you have some Exxon stock that you bought a few years ago that you're planning to sell this year. Lets also assume your federal marginal tax rate is 28%.

Giving cash: If you give your charity a cash gift then you'd give them $1000 and deduct that from your taxes and save $280 on your tax bill. When you sell that Exxon stock you end up paying capital gains taxes. You bought 50 shares of the stock in 2003 when it was trading for $35 a share and not its going for $94 now. So if you sell your 50 shares you'll get $4700 and owe capital gains on $2950 of that. Your capital gains tax bill will be $443. Between the donation and your stock sale, your charity gets $1000 and you walk away with $3537.

Giving Stock: If on the other hand you gifted the Exxon stock directly to the charity you can avoid that capital gains tax bill AND still benefit from an income tax deduction from the gift. Lets say you gift 11 shares of your stock straight to the charity thats a gift value of $1045. That leaves you with 39 shares of stock you sell for $3705. Your capital gains bill on that is $210. So if you gift stock your end result in this example is the charity gets $1045 and you walk away with $3787 after taxes.

United Way's website has a calculator that shows side by side comparisons of gifting stock versus cash if you want to play around with other examples.


Of course this only works if you owe taxes on the stock. If you had instead bought Washington Mutual in 2003 instead of Exxon you would have about $28 /share loss for that stock. Gifting your WAMU to your charity would potentially hurt your tax situation cause if you sell that stock you could write off the loss.


So in summary if you have stock you're looking at selling and give money to charity then you should consider the option of gifting the stock to the charity outright.

How to save on gas #3 - Don't drive too far out of your way to save a nickel on gas

Gasoline is getting more expensive all the time. So many of us are looking for ways to save a few bucks on gas. One obvious way we might try to save on gas is to buy at the cheapest station. If the station by my house is currently charging $3.45 for regular and there's a station on the other side of town charging just $3.29 then I would prefer to buy at the cheaper station right? If I have a 15 gallon tank and fill up for about 14 gallons then I'd be saving $2.24 every time I fill up. But what if that other station is 5 or 10 miles out of my way? Remember that it costs money in gas to drive out of your way. Before you consider driving out of your way to a cheaper gas station, figure out how much it will cost you in gas to do so.

As a simple rule of thumb: I would think first before driving more than 1 mile round trip out of your way per 1% difference in the price of gas.

This is a rough rule of thumb and the exact break even point is going to depend on the size of your gas tank and the MPG rating of your car. But the 1 mile per 1% cost rule of thumb is close enough for ballpark figuring and relatively easy to remember.

For example if the gas is 5% cheaper then don't drive more than 5 miles to buy it (2.5 miles each way). Say gas is $3.20 closer and $3.14 farther away (5% difference) if your car has a 15 gallon tank and gets 20 mpg then by driving 5 miles you'd be using $0.90 in gas to save $0.78 on the fill up, which is only a $0.12 savings.

To figure your own exact savings you need to know your own cars MPG rating and your cars gastank size. The gastank size is often listed in the owners manual. You can figure your actual MPG by measuring your mileage on your odometer and dividing by the gallons you use at a fillup, but do this over several fillups and average out the results.

You can figure savings of driving for cheaper gas using the following formula:

Savings = ( Expensive GAs - CheapGas ) * Gastank size - (Distance driven / car MPG) * Cheap gas

In the last example that would be:

= (3.2 - 3.14) * 15 - (5/20) * 3.14 = 0.12

What I would recommend instead of driving out of your way is to shop the cheapest gas station that's in your normal driving area. OK so what do I mean by "normal driving area"? I simply mean the places you normally go. This would include your path to and from work, your route to the grocery store and any other places you normally visit. Look for any of the cheaper gas stations in your normal driving areas. Then look to see if any of the cheaper stations are a little bit out of your way from your normal trips.

So lets put it all together and do a comparison example between driving too far out of your way and just staying in your normal driving range. Lets say my car has a 15 gallon tank and I fill up for 14 gallons at a time and it gets 20 mpg. I drive to and from work every weekday. Its a 3 mile trip each way. There is a grocery station right on that trip that is $3.45 right now. But if I drive just 1 mile out of my way on my way home I can swing by the local Costco and fill up for $3.27. That 1 mile extra only costs me 1/20 gallon ($0.16) and I will save $2.54 total filling up at Costco less the cost of travel. If however the only Costco was 16 miles out of my way then I'd be spending 16/20 gallons = $2.62 in gas for the round trip and actually only saving $0.08 to fill up at the cheaper station by driving too far to do so.