“In the Beg…Mode Is Trouble!”
Where do I…begin? I got it! With a question that I think about a lot. Why would you use Beg. Mode?!
Let me just say that this post won’t likely be the end of my rant on Beg. Mode. In fact, I’ve got another one teed up for the future. But you’ll have to wait for that one.
This image was created with the assistance of DALL·E and prompts from Brent Pritchard.
Here’s an excerpt from my book Would Your Boomerang Return? What Birds, Hurdlers, and Boomerangs Can Teach Us About the Time Value of Money (2023):
This “Good to Know” takes a slightly different form. You need to know that I’ve heard of the financial calculator Beg. Mode; however, I’m not a fan. Why don’t I recommend using Beg. Mode?
First, I like that I can tell you that “N” will always represent the number of consecutive payments for an even annuity that are subject to the same true investment yield and the same time span in between payments (on the timeline)—regardless of when the first payment is made.
Beg. Mode is inconsistent with this definition as it relates to the building block Future Value of an Ordinary Annuity equation since its version of “N” considers the number of consecutive payments less one: the amount of the even annuity payment would need to be added manually to determine the FV(OA).
Consistency is one key to success in life, so it seemed appropriate to set you up for success as you go about applying the Mathematics of Finance to analyze and evaluate real-world Time Value of Money situations. Using Beg. Mode and needing to remember to manually add the amount of the even annuity payment to ultimately determine the Future Value of an Ordinary Annuity would be a solution in search of a problem.
There is tremendous value to a principled approach. That’s why Dave Ramsey’s program for helping people get out of debt is so successful. Once the Baby Steps are memorized, you know what to do. And when it comes to budgeting, every dollar has a name. It’s genius. Dave Ramsey is so smart that he was able to take the brain out of personal finance. Stick to the principled approach, and you’ll do just fine.
Second, it’s easy to forget to switch back to End Mode. This is like being one question off on a standardized test. Not good.
By way of example, say you’re trying to figure out the FV(OA) three years from now for a series of four investments of $1,000, assuming a true annual investment yield of 5% and that the first deposit is made today with subsequent deposits on each anniversary. The below Building Block Future Value of an Ordinary Annuity equation allows you to double-check the answer. You might be thinking, Why not use the Building Block Future Value of an Annuity Due equation? Or, Shouldn’t I be using the Building Block Future Value of an Annuity Due equation because the first payment is made at the start of the investment period? The reason we use the Building Block Future Value of an Ordinary Annuity equation is because moneys are not “working” to earn a return after the last payment is deposited. This is a key point. And then there’s consistency: the fact that “N” will always represent the number of consecutive payments for an even annuity that are subject to the same true investment yield and the same time span in between payments.
Why do you feel comfortable using Beg. Mode if you haven’t memorized all of the Building Block Time Value of Money equations to double-check your work? (There are seven more where these came from.)
Illustrations by Scott Alberts. Copyright 2022 Brent Pritchard. All rights reserved.
Brent Pritchard is an author and college finance lecturer with over two decades of industry experience and cofounder of Boxholm Press, LLC, a family-owned-and-operated publishing company providing educational content, products, and services. He pioneers an innovative and approachable new way of learning and teaching the Time Value of Money as well as thought leadership in other business topics. His most recent book is Would Your Boomerang Return? You can contact him on his website here.