Several readers have written me excitedly asking how exactly I do some of the calculations on this site and how compound interest works. Usually, I point them at various online calculators, but the truth of the matter is that a basic understanding of how a spreadsheet works and how compound interest works makes it possible to calculate almost every personal finance situation that you want.

I originally wrote this all as one post, but I’ve since split it up into several, which will be posted in order throughout the weekend. If you found this piece enlightening, check back at the end of the weekend and there will be plenty of interesting things to try out!

Also, be aware that this first entry is intentionally very simple so that people who are unfamiliar with spreadsheets can follow along. If you know the basics of using a spreadsheet and the very basic idea of compound interest, this will probably seem very basic for you. That’s fine; tune in later and we’ll be kicking things up a notch.

Anyway, in the interest of saving money, I’m going to use OpenOffice Calc for these examples. For most things such as this, it is functionally identical to Microsoft Excel, so if you have a copy of Microsoft Office, you can basically follow along with these examples. I attempted to use Google Spreadsheet for examples, but it was quite frustrating to use for repetitive calculations. OpenOffice Calc is free, open source software; you can get it for free at OpenOffice.org.

Got a spreadsheet now? Let’s get started.

What is interest? Interest is the “rent” paid to borrow money. When you put money in the bank, you are essentially lending your money to the bank so that they can use it for various investments. In exchange for that, they pay you a small amount of interest. Similarly, when you use a credit card, you are borrowing money from a bank, and for their investment in you, you must repay that investment with interest.

What is compound interest? Compound interest means simply that rather than directly giving the interest back to you, it is instead added directly to the amount of money you loaned or deposited. After that interest has been added to your balance, your balance is now higher, and thus the new balance earns more interest than before.

Let’s get started and see how this works. Fire up OpenOffice Calc (or Excel). You’ll see the following screen:

This is the default screen for OpenOffice. If you’ve ever used Excel or any other spreadsheet, this should feel familiar; if you haven’t, play around for a bit. You’ll find out that each little rectangle can be filled with information. This is really cool because we can make those rectangles do automatic calculations for us really easily, and those calculations can really illustrate what’s going on with our money.

In the first four cells of column A, I’ve entered a few labels. These will be used to describe the data we’ll put in column B to the right. You’ll see that cell A4 is highlighted (it’s called A4 because it’s in column A and row 4 - look to the left of the row to see the number and to the top of the column to see the letter) and in the lower left there’s a little black square. If you click on that little black square and drag downwards, you’ll see that the spreadsheet will automatically fill in more years for you. Nifty! This auto-fill feature saves a ton of time for doing repetitive calculations as we’ll see in a bit.

We want to do some compound interest calculation, so we need to enter a balance (put this in cell B1, to the right of where we labeled “Balance”) and an interest rate (in B2, just to the right of the “Interest Rate” label). You should be sure to put a percent sign at the end of the interest rate value so the program knows you’re talking about a percentage and you might want to also put a dollar sign in front of the balance amount so the program knows you’re talking about dollars. When you’re done, things will look something like this:

Notice that in cell B4, I’ve also written =B1+B1*B2 … what does that mean? I’m telling the program that in this cell I want to see the value in B1 (the balance) plus the value in B1 multiplied by the value in B2 (the interest). This is the basic interest calculation: we want to see the original balance (B1) plus the interest earned a year (B1*B2). If you type in =B1+B1*B2 into that cell and hit enter, you’ll see the result of the calculation: $10,500.00 in this case.

Here’s the neat part, and this will hopefully begin to show you the power of a spreadsheet. Go back up to B1 and change the balance to something different. As soon as you do that, the calculated balance in B4 automatically changes! You can change the interest rate in B2 as well. Throw in all kinds of numbers to see what happens.

Now we’re going to see what happens in year two. This time, in cell B5, we’re going to enter the formula =B4+B4*$B$2 … that’s a bit different than before. Just bear with me for a minute. When you enter that formula, you’ll see that it takes the value in B4 and uses that as the initial balance to calculate the second year’s worth of compound interest, giving you a new balance of $11,025.00 in this example.

Now, click on B5 and then click and drag down on that black square in the lower right, all the way down to the label for Year 20. When you let go of the mouse button, you’ll see that the calculation for all of the years is done. This is why we did the $B$2 part; the program knew to automatically change the balance each time, but we wanted to tell it to always point back to B2 for the interest value no matter what. You can jump back up to the top and play with the interest rate and the balance to see compound interest at work. You can keep dragging down for as far as you wish, but after a while you start looking at numbers that aren’t really feasible for your lifetime.

If you want to see how much interest is actually earned each year with compound interest, just start another column off to the right as pictured above. In the Year 1 row in cell C4, enter the formula =B4-B1 to see how much interest was earned in year one…

… and then enter =B5-B4 in cell C5 to calculate how much is earned in year two. Once you’ve done year two, click on cell C5 and then drag that black square in the lower right of the cell down again to automatically calculate the earnings for all of the other years. See how that money grows? That’s the power of compound interest.

Next, we’ll tackle the idea of how monthly compound interest works, learn what the difference is between APRs and APYs, and see how that affects you.

The Money Book For The Young, Fabulous, and Broke is an attempt by Suze Orman to take personal finance ideas that traditionally appeal to older generations and make them palatable to Generation Y. The back states clearly that this isn’t your parents’ personal finance book, but is there anything really interesting or different about the book that makes it stand out from the crowd? This week, let’s find out!

The first thing you’ll notice when you open the cover of Suze Orman’s Money Book For The Young, Fabulous, and Broke is that it’s colored heavily in bright blues and greens all over the place. The second thing you’ll notice is that the entire book has an almost blog-like feel. The end result is a very unusual book reading experience, at least as compared to other personal finance books.

What do I mean by “blog-like”? The book is divided into ten chapters on general topics, which is straightforward enough, but each chapter itself is divided up into tons of short, bite-sized pieces that feel much like a blog post. Many of these are in a question and answer format, meaning that the concepts presented are often adapted into example situations enabling readers to related to the experiences of others.

While some of the questions are pretty clearly connected to the life experiences of a twentysomething, one mark in the book’s favor is that many of the questions really apply well to anyone who is having difficulty getting started with their personal finances, and the design and layout of the book makes it accessible to very busy people who only have time to read a short piece or two at a given time.

However, the real question is if there’s any meat inside this unusual format, so let’s get started.

A Walk Through The Money Book For The Young, Fabulous, and Broke

Chapter 1: Know The Score
The first chapter is all about the credit score: what it means, how to get it, and how to improve it. Most of the main part of the chapter lays out how a credit score is defined, which is almost exactly the same as Wikipedia’s definition of a credit score. Suze’s advice is spot-on here: knowing exactly how a credit score is defined is the biggest key to knowing how to improve it, as most common mistakes with improving a credit score are simply the result of not understanding what’s going on. She’s even wise to the freecreditreport.com ripoff - you should only get your score from the government or directly from Experian, Equifax, or TransUnion.

Most interesting problem: I am slowly paying down my credit card debt and plan to cancel each card as I get the balances to zero. For the love of God, don’t do this. Your oldest credit cards are part of the foundation of your credit report. If you cancel your earliest cards, your credit rating will go down as you are choosing to shorten the length of your credit history, which is a significant factor in calculating your score. Cut them up instead, or put them away in a lock box somewhere.

Chapter 2: Career Moves
The general point of this chapter is that if you’re not happy at your job, find a different one or else subject yourself to a lifetime of misery, something no one wants. Since this book is targeting twentysomethings, this is good advice; you’re at the very point in your life where a career change is most appropriate, before the burdens of a marriage, a home, and children begin to force you to remain employed. Some of her advice here is kind of odd, though; she encourages using credit cards for necessities if you’re working a job that pays very poorly but has strong potential to pay a lot more in the future. I’m not sure I agree with that; I think it’s a better life skill to learn how to suck it up and make it work, so to speak.

Most interesting problem: I hate my job and want to go back to school. In almost every case, this is a bad idea, as it prolongs the inevitable challenge of finding strong employment, increases your debt burden, and also gets you started in the workplace at an older age. For most people, going back to school is a crutch to lean on because they can’t get it done.

Chapter 3: Give Yourself Credit
As I mentioned before, Suze is often just fine with credit cards, and this chapter is basically about how to use credit cards in a sane and sensible manner. I agree with her that they can be used as tools, but the problem is that the modern consumerist society is basically set up to encourage people to spend beyond their means, in which people bringing in $130,000 a year are buying Ferraris and million dollar homes. Marketing has become so effective that for many people it makes the debt risk seem trivial in comparison - and then suddenly they find themselves in desperation. Thankfully, this chapter bookends the “use a credit card” advice with some sense, like making sure that the things you buy are actually necessities, and that eating out (for example) is not a necessity.

Most interesting problem: The only debt I have is my hefty balances on five credit cards. I want to begin to pay them off, but I don’t know where to start. The advice here is a home run: pay the minimum balance on all of them, but pay as much extra as you can on the one with the highest interest rate. Once that’s paid off, move on to the others. This is the route to paying the least amount possible in finance charges.

Chapter 4: Making The Grade On Student Debt
Student loans may be the best investment you make in your life, because a college degree increases your earnings potential by a large amount. However, walking out of school into an uncertain marketplace with a load of debt is certainly frightening. However, there are also a lot of things working in your favor: a low interest rate, tax-deductible interest, and the fact that you’re now holding a college degree are all big positives. If you don’t have a degree, but you think you’re capable of earning one, student loans are well worth it. As for consolidation, you should do this when the interest rates are low and you can lock in a rate; otherwise, it’s not worth it.

Most interesting problem: I have a little money left after paying my monthly bills, but I don’t know if I should use that cash to pay off my student loans or to invest in my 401(k) or a Roth IRA. If your company’s 401(k) gives you a match, you should invest in that above everything else. If you’re not doing that, you’re basically saying “no” to thousands of dollars in free money. Sure, you don’t get to spend that money now, but your older self will thank you profusely for it, as every dollar you invest that’s matched at age 25, growing with 10% annual return, becomes $90.52 when you’re 65. That’s an unbelievable rate of return and one you should be taking advantage of every step of the way.

Chapter 5: Save Up
This chapter’s focus is on the concept of living a bit frugally so you can afford important things like a cash emergency fund and also have the ability to save for major purchases, such as automobiles (so that you aren’t eaten alive by yet another loan with a strong interest rate). Most of the ideas in this chapter are pretty low key and sensible, but it takes commitment not to just take that new extra money and spend it on other stuff (I know that’s what I used to do - if I saved $25 by eating at home for a week, I could suddenly “afford” a new book). The chapter seems to be missing one important part: taking that newfound money and automatically depositing it into an emergency fund account.

Most interesting problem: I want to start a savings account, but everyone tells me I should pay off my credit cards first. This is generally true, but the real answer comes from comparing the interest rates. If your savings account returns 5% and you have a 4% credit card, then you should have your money in a savings account. However, most people have credit cards with interest rates in the 18% range and a savings account that’s far, far lower - if this is you, get those credit cards paid off as soon as possible.

Chapter 6: Retirement Rules
If you haven’t figured it out yet, I quite like this book; I think it really hits the target audience on the head, and nowhere else is this more true than in this chapter. Right at the front, in a huge font, it says “Unlike your grandparents and maybe even your parents, you are going to be pretty much on your own for funding your retirement.” This book is out there getting this vital message across to Generation Y, and for that I’m quite impressed. If the point wasn’t clear enough, another huge font header a few pages later says “You have been dealt a tough hand, and that requires getting an early jump on your retirement savings, because your best friend right now is time.” The chapter is filled with pretty typical retirement information: start an employee-matched 401(k) or 403(b) plan immediately and also get a Roth IRA if at all possible. But the message is very loud and clear: you’d better get started because the baby boomers are going to suck the pot dry before you get old enough, so it’s up to you to save for yourself.

Most interesting problem: I have credit card debt that I am paying 18% interest on. I wonder if I should borrow money from my 401(k) to pay off that debt. In short, no, because doing this will eat you alive with taxes. The money you paid into the 401(k) was pre-tax money, but you’ll pay back the loan with post-tax money, which basically amounts to a 25% interest rate (or so) on the loan on top of what they quote you. In other words, it’s actually much worse than most credit cards. Focus instead on trying to raise your credit score, then transfer that amount off to another credit card.

Chapter 7: Investing Made Easy
The first six chapters of the book felt as if they laid a good foundation for financial stability; the last four chapters focus on more detailed topics. This chapter basically compresses the basics of investing in stocks down to about fifteen pages. I’ll compress it even more for you: buy some stock-based mutual funds and focus at first on ones that cover the whole market, like index funds. Given that this book is intended for twentysomethings, this advice is spot-on.

Most interesting problem: I get sick when my 401(k) goes down; I don’t want to invest any more. This is a question of perspective, and the person here is taking a very short term perspective on something that should have a very long term perspective. In fact, if you’re investing regularly, you’re better off for the long haul if the market goes down early on, because you’ll be buying at the market’s bottom and can ride the elevator all the way to the top floor.

Chapter 8: Big-Ticket Purchase: Car
This chapter is full of great advice about buying a car that will disappoint people who want a Lexus straight out of college: leases are a rip-off, the best deal is a late model used car that isn’t ultra-showy, and the more cash you can pay the better off you’ll be. All of these points are true - and yet I just saw a person who graduated just a few months ago and is employed as a secretary driving a leased Lexus. Sheesh.

Most interesting problem: I use my car 50 percent of the time for business. Even with the drawbacks of leasing, I figure the tax break makes it a good deal for me. Whenever you use a tax break to justify a purchase, you’re getting ripped off. Plain and simple, leases are a giant rip-off that leave you with nothing in the end except an empty wallet.

Chapter 9: Big-Ticket Purchase: Home
This chapter starts off with a great twenty page walkthrough of the home-buying process, along with a lot of encouragement about how good of an investment a home purchase is. I tend to think of one’s primary home not as an investment, but it is something with value that does appreciate over time. This chapter is great if you know nothing at all about the home-buying process, but even as someone who is still months away from my first home purchase, it was a gloss-over for me.

Most interesting problem: A starter home where I live costs at least $330K. The only way I can afford it is if I take out an interest-only loan. Then you can’t afford it. This is very similar to leasing a car, except at least you have some chance of the property value increasing over the long haul (and that’s a big if, depending on how big the housing bubble is in your area and how hard it’s popping). Live as cheap as you can until you can afford to buy something with a loan that can actually be paid off in some reasonable amount of time.

Chapter 10: Love & Money
Yes, a “love and marriage” chapter finishes out the book. Again, this is good, solid, simple advice: make sure you and your significant other are on the same page financially, because there will be big problems if you’re not. This chapter is great if you’re in a relationship that’s not incredibly serious yet, but you want some guidance on how the finances will work if you do take the plunge.

Most interesting problem: I am dating someone I really like personally but hate financially. The way a person handles their finances is a character trait that will eventually show up in other dimensions of life. If you have problems with the way they handle their finances already, it will only get worse - and other problems might crop up, too. Think about it carefully before you take any sort of plunge.

Buy or Don’t Buy?

Suze Orman has found her target niche. In other words, this book is the book to buy if you’re a young person (within two or three years of college graduation on either side) struggling with lots of financial questions. I’ve read tons of personal finance books in the last year and I’ll freely admit that some were better than this one, but none address the issues and questions of a specific age group as good as this one.

In fact, I’m going to go so far as to say that I’m already planning on giving this as a graduation gift to two relatives who are approaching their college graduation.

If you’re older than about twenty eight or thirty, there are other books that are much better written that address financial issues from a whole-life perspective rather than focusing in like a laser beam on the college graduate group; try Your Money Or Your Life or The Millionaire Next Door for starters. However, if you’re looking for a graduation gift for a college graduate (or are near college graduation yourself), this book is really worthwhile.

If you’re between the ages of twenty and twenty nine, I give this one a strong buy (or at least a strong “check this out from your local library”).

I originally reviewed The Money Book For The Young, Fabulous, and Broke in five parts, which you can find here, here, here, here, and here if you would like to read the original comments.

The Money Book For The Young, Fabulous, And Broke is the sixteenth of fifty-two books in The Simple Dollar’s series 52 Personal Finance Books in 52 Weeks.

If you have more than one student loan after college, chances are you’ve been approached by more than one group seeking to consolidate your student loans (if you haven’t graduated yet and have multiple loans… just wait). These groups promise all sorts of things, from a percent reduction in your balance to a low interest rate, to get you to consolidate your loans through them. When I first started receiving these calls, I was completely lost, but after doing some research, asking a lot of questions, and finally going through with it, I discovered several key facts about loan consolidations that are well worth sharing.

If you’re unsure about what a student loan consolidation even is, it is essentially a loan swap in which you get a brand new student loan that equals the combined balance of all of your other loans. A consolidated loan often has a somewhat lower interest rate than the other loans, but this lower rate is balanced out by the fact that the term of your consolidated loan is effectively reset, meaning that a consolidated loan repayment ends at a later date than the original loans - you’ll be paying less interest per year, but you’ll be paying it for more years.

First of all, never, ever give any personal information to anyone who calls you wanting you to apply for a student loan. You have no idea who is on the other end of that line and giving your personal information to them is a sure way to get yourself locked in - to identity theft. This isn’t a suggestion, it’s a rule - never, ever give any of your personal information to anyone who calls you in an unsolicited fashion.

Now, about the things they’ll tell you if you’re thinking about consolidating: in truth, there are really only two benefits to consolidation: it can lower your monthly payments (as well as potentially lower the overall amount you’ll have to pay if you’ve just started repayment) and it also means that you’ll only have to deal with one loan company for all of your student loans - no more multiple payments. However, there is a chance that it may actually increase the total interest you might pay over the life of your loans if you’re not careful. Some lenders will make other claims, such as stating that it will help your credit report out, but that’s largely false - the formula that generates your credit score accounts for multiple student loans without breaking a sweat. Let me repeat: consolidation of student loans will not affect your credit history.

How will you know if a student loan consolidation will save you money? There’s really no way of knowing without running all the numbers yourself, and that can be fairly complicated. However, if you’re very early in the life of your loan, you can get a pretty accurate number to work with by multiplying each of your loans by its respective interest rate and adding them together, then dividing that number by the total of all of your loans. For example, let’s say you had two loans for $20,000 each at 7.5% interest, and one loan for $15,000 at 8.5% interest. Take $20,000 and multiply it by 7.5%, which gives you $1,500 (and you have two of those, so it’s $3,000 total), plus $15,000 times 8.5%, which is $1,275, giving you a total annual interest of $4,275. All of the loans added together are $55,000, so divide $4,275 by $55,000 to get 7.77%. If your consolidated loan doesn’t beat that by at least a little, it’s not worth consolidating, and the older your loans are, the greater the difference needs to be to consolidate. If you’re past the five year mark or so, it’s almost never worth consolidating because the interest rate benefit will be eaten up by the longer term.

Also, some offers will include a small percentage reduction in your balance. Basically, a balance reduction is worthless if it doesn’t come packaged with a very competitive interest rate because even a 0.5% higher interest rate will undo the benefit of a 3% balance reduction over the lifetime of the loan.

Note that consolidation will not remove a defaulted loan from your credit history. A defaulted loan is serious bad news for your credit report, and it’s even worse if you consolidate before dealing with that loan. Why? Even though it’s now marked “paid in full,” it’s also still marked as being in default and that mark will stay on your credit history for seven years. Rather than consolidating, do whatever you have to do to get that loan rehabilitated before you consolidate.

In other words, you should really only consider consolidation if you are current on all of your loans, you haven’t been paying on them for too long, and you can get a distinctly lower interest rate. If you answer “no” to any of these, a student loan consolidation is probably not for you.

As I mentioned recently, earlier this week I found an old credit card statement and spent some time evaluating what sorts of stupid things I spent my money on just a year ago. I decided to circle everything on the list that was directly related to a hobby and total each hobby up to see where it led.

Basically, my interests at the time broke down into four main hobbies:

Magic: the Gathering For about two years, I played a game called Magic: the Gathering, in which people bought and collected their own cards and used them to play a game against each other. I was quite good, to the point that I didn’t have to buy a single card for better than a year (I won many, many tournaments), but I did travel around a substantial amount to nearby large tournaments. I spent $108.22 for the month on this hobby, mostly on traveling to tournaments.

Books I can go through books like a freight train. This is aided by the fact that I often am still awake at two in the morning reading, but I’m still able to function normally the next morning, even now. I spent $222.41 for the month on this hobby.

Video and computer games This hobby was seriously on the wane when my son was born, but I still bought two video games during that month and rented several others. I remember distinctly sitting on the floor with my son once as I played Katamari Damacy … anyway, I spent $84.11 for the month on this hobby.

Collecting political buttons I rarely spend more than a few dollars on this, and that’s usually in cash directly to individuals that have buttons. I especially love buttons from primaries and also the losers in general elections in the 1960s and 1970s. Does anyone out there have a Shirley Chisholm 1972 button they’d be willing to part with? Anyway, I spent nothing on this hobby for the month.

In other words, on the items I could definitely tie to hobbies, I spent $414.74 in a single month, an amount that had to drastically drop. Yet, at the same time, I didn’t really want to let go of any of my hobbies. So here’s what I did to fix this problem.

First, I listed every hobby I had now and every potential hobby I had an interest in. This turned out to be quite a long list of potential interests, including learning a foreign language, starting a blog (hmmm…), learning to knit, and so on. I included

Once I had this list, I ranked everything on each list by cost and by my interest in it. This took a while, as I had to make some educated guesses in both areas.

After that, I immediately axed the most expensive third of the hobbies and also the bottom two thirds of the interest list, then I combined what remained. This eliminated roughly half of the hobbies, leaving me with only the most interesting and the most cheap. Anything that showed up twice (as the political buttons did) was a hobby I kept.

I then spent some time thinking about each hobby and how I could minimize the cost. By cost, I primarily refer to financial cost, but I also included the cost of time and the flexibility of it. For example, Magic was fairly inflexible because I had to go to tournaments at certain times, but reading was very flexible because I could pick up a book anywhere at any time.

In the end, looking at things from a completely different perspective led me to make some serious changes. I dropped Magic and video games as hobbies and added a blog as a hobby, keeping the political buttons and the book reading. Blogging is very inexpensive in terms of cost and is actually turning a profit right now, while button collecting is nearly free as well.

But what about the books? Reading is and was my top hobby, so I was loath to drop it. Instead, I discovered my local library all over again and found out clever ways to cut down on the cost of books.

In short, the key is to simply consider your interests and try to choose ones that cost less. Even if your passion is expensive, there are always ways to reduce the costs.

Five Minute Finances is a series of tips on how you can save significant money or reorganize your financial life in just five minutes. These tips appear Monday, Wednesday, and Friday on The Simple Dollar.

Ever had to face down a $150 grocery bill? I have, and the reason was usually that I entered the grocery store without any sort of plan, wandered down every aisle trying to decide what we were going to have for supper, and ended up just buying tons of unnecessary stuff - including even some things I already had at home.

You can avoid that pain by starting a grocery list, sticking it on the refrigerator, and adding items to it as time goes on. Here’s what you do.

1. Get a magnetic note pad or make one yourself. You can get a cheap magnetic pad from Amazon, or make your own by gluing a freebie refrigerator magnet (or two or three of them) to the back of a normal pad of paper.

2. Attach a pen to the pad. Just take a pen with a cap, tie a piece of kite string around it, tape that string in place, then tape the string to the back of the pad. Done.

3. Put it on the fridge. Now, slap that pad up on the refrigerator door so you have a place to conveniently make a list.

4. Whenever you notice something you need, write it down. I often notice things we’re getting low on throughout the week, so whenever I see something that we actually need, I jot it on the top sheet of the pad.

5. Before you go to the store, think of a few meals you would like to make, see which ingredients you have, and write down the ones you don’t. This usually means planning your meals ahead a bit. My wife and I usually just identify three to four meals for the coming week and check to make sure we have all the stuff for them. Whatever we don’t have goes on the list.

6. Take the list to the store with you and stick to it as best you can. Once you’re in the store, you’ve already got a list of everything you need, so just stick with it. Don’t buy anything that’s not on the list - don’t even look at it.

This seems trivially simple, but very few people actually take a few minutes to do this and it saves a lot of money. How? By focusing on your list rather than the stuff on the shelves, you’re much less susceptible to the clever packaging and advertising of the products on the shelves - and thus you wind up with fewer unnecessary items in your cart.

Time spent: A minute here, a minute there
Money saved: $20 per store visit (that’s about what I save with weekly shopping trips, based on “before list” and “after list” comparisons)

Recently, a reader left this comment on an earlier post about the auto lease trap:

What if you lease a car like a jetta that can be leased for $248 a month and take the difference between what you would be paying if you bought it and put that in a savings account?

In other words, what if you lease a fairly economical car and put the difference between the cost of the lease and the cost of a monthly payment on it into the bank. How would you end up?

Let’s use his Volkswagen Jetta as an example. I did some surfing for lease and financing prices on a 2007 Volkswagen Jetta. I found a wide range of prices based on various options, so I settled on a relatively low-end number of $18,750 as a price (with 2.9% APR, as found here). I also found repeated offers for leasing a 2007 Jetta for $199/month (like this one).

To make the calculations easy, we’ll compare buying the car with nothing down for 39 months versus leasing the car for 39 months. With the monthly lease, you’ll pay $199 a month for 39 months, then have no asset at the end, paying a total of $7,761, but you also have to have $1,200 down and a $575 acquisition fee due at signing, bringing your total price to $9,536. If you average out that additional cost over the life of the loan, your effective monthly payments are $244.51. On the other hand, with the monthly payments, you’ll pay $504.36 a month for 39 months and still have your Jetta at the end, paying a total of $19,670.04.

If you lease the car, you can dump that extra $305.36 a month into a HSBC Direct savings account and earn 5.05% interest on it. After 39 months of doing this, you’ll have $10,966.81 in that account. This may or may not be enough to buy a late model used car - but it will be fairly close. Better yet, at the end of the lease, you have the option to buy the Jetta for $10,687.50, which means you can pocket the difference (in theory - finish reading this article).

On the other hand, if you don’t lease the car, you completely own your Jetta after 39 months while it is still covered by warranties.

At first glance, the two deals seem fairly similar. In both cases, you can wind up with a Jetta that’s yours after 39 months, and the actual money you’re obligated to pay is within a couple hundred dollars of each other. However, once you read the fine print of the lease agreement, it becomes clear that a leased car isn’t as good a deal as buying your own car. To quote from vw.com:

At lease end lessees responsible for $0.20/mile over 39,000 miles and for damage and excessive wear. Additional charges may apply at lease end.

For every 1,000 miles you drive it over the 39,000 you’re given over the length of the lease, you’re dinged $200. For every little ding or scratch that the dealer finds on the car when you return it, you’ll be dinged a little more. Not only that, “additional charges may apply at lease end” doesn’t sound too promising, either.

In short, even if you get a great lease deal and you put every dime of the money you save under a car payment into a savings account, you still get a raw deal with a lease. The best deal of all, of course, is to pay cash, but if you’re going to buy a car you can’t pay for immediately, leasing is simply not the best deal.

The Money Book For The Young, Fabulous, and Broke is an attempt by Suze Orman to take personal finance ideas that traditionally appeal to older generations and make them palatable to Generation Y. The back states clearly that this isn’t your parents’ personal finance book, but is there anything really interesting or different about the book that makes it stand out from the crowd? This week, let’s find out!

Suze Orman has found her target niche. In other words, this book is the book to buy if you’re a young person (within two or three years of college graduation on either side) struggling with lots of financial questions. I’ve read tons of personal finance books in the last year and I’ll freely admit that some were better than this one, but none address the issues and questions of a specific age group as good as this one.

In fact, I’m going to go so far as to say that I’m already planning on giving this as a graduation gift to two relatives who are approaching their college graduation.

If you’re older than about twenty eight or thirty, there are other books that are much better written that address financial issues from a whole-life perspective rather than focusing in like a laser beam on the college graduate group; try Your Money Or Your Life or The Millionaire Next Door for starters. However, if you’re looking for a graduation gift for a college graduate (or are near college graduation yourself), this book is really worthwhile.

If you’re between the ages of twenty and twenty nine, I give this one a strong buy (or at least a strong “check this out from your local library”).

The Money Book For The Young, Fabulous, And Broke is the sixteenth of fifty-two books in The Simple Dollar’s series 52 Personal Finance Books in 52 Weeks.

My wife and son both fell asleep before 8 PM this evening, so I took that opportunity … to read. What did I read? I picked up Gilead off of the bookshelf and read it for the third time, this time in one sitting. It’s a truly excellent novel, but you have to be a bit patient with it as it moves a bit slow at first. Anyway, on with the personal finance postings.

The Blindingly Obvious Ways To Succeed In Business And Life Number three is have patience. (@ the art of debt)

I Didn’t Need Dave Ramsey To Get Out Of Debt This is a set of really nice tips on escaping debt from a really good writer. Check him out. (@ money, matter, and more musings)

Suze Orman Simplified, Part One and Part Two This is basically an ongoing summary of Suze Orman’s complete philosophy on personal finance issues. If you’ve seen her show on CNBC, these posts basically lay the foundation of her ideas. (@ help your money)