6 Cool Financial Math Tricks and Rules

Here are 6 cool financial math tricks and rules that I know about. These are pretty common, so you may know them already. Take a look. Do you know any of these?

1. Rule of 72 To Double Your Money

The rule says that to find the number of years required to double your investment, you just divide the growth rate into 72. For example, if you want to know how long it will take to double $10,000 at 9% annualized gain, divide 9 into 72 and you get 8 years.

You can also do the reverse calculation to find the rate of return to double your investment. For example, if you want to double your money in 5 years, divide 5 into 72 and you get 14.4%.

Here are some more articles and posts about this rule:

Wikipedia: Rule of 72
Money Chimp: Rule of 72
Investopedia: What is the “rule of 72″?

2. Rule of 115 To Triple Your Money

This is very similar to the Rule of 72. Basically, you can find the number of years required to triple your investment by dividing the growth rate into 115. For example, if you invest in the stock market at 11.5% annualized gain, divide 11.5 into 115 and you get 10 years.

3. 120 Minus Age Rule Of Asset Allocation

For those who are new to asset allocation, it may be hard to decide how much to put into more aggressive investments like stocks versus more conservative investments like bonds and cash equivalents. Initially, the rule was 100 minus age, but with people living longer and spending more time in retirement, the rule has been updated to 120 minus age.

For example, if you are a 40 years old person, you should have 120 minus 40, or 80% of your portfolio invested in stocks and 20% in bonds.

Some more:

Blueprint for Financial Prosperity: Stock Allocation Rule: 120 Minus Age

4. Wealth Rule From The Millionaire Next Door

I previously discussed this in my post, Are you wealthy? Here’s a test, Stanley and Danko give us this cool “Wealth Rule.”

Net worth (or Assets – Liabilities) = your age multiply by your pre-tax income divide by 10

If you have twice the calculated result, you are indeed on your way to become wealthy!

5. 10% Rule Of Saving For Retirement

Save 10% of your salary every year and you will have enough money for your retirement. This one is quite hotly debated as you can see from the links below. In order to make this rule works, there are some serious assumptions:

You save consistently every year – can you do this with events like buying a home, wedding, childbirths, sending your kids to college, etc.?
You save at least 30 years prior to retirement – did you start early enough?
You invest the money you saved and getting at least the market rate of return

Here are some more articles and posts about this rule:

The Motley Fool: The 10% Savings Myth
Saving Without A Budget: Why the “10% Rule” is Actually a Good Thing
CNN Money: Why the 10% solution is actually 90% wrong

6. Estimating Your Yearly Income Using Your Hourly Wage

This is actually one of the first tricks I learned. You can quickly estimate your yearly income by multiplying your hourly wage by 2,000. For example, if you make $20 per hour, your yearly income will be approximately $40,000. Neat!

Do you know of any other cool tricks? Please share with the rest of us. Thank you.

7 Comments

Lazy Man and Money
August 7, 2007, 11:10

I’d get rid of the Wealth Rule. It doesn’t apply those who are young or just out of school.
J at Home Finance Freedom
August 7, 2007, 11:26

Hello. This is a good list. The Fool and CNN articles have misleading titles because the articles apparently admit that the rule would work but (they argue) that most people do not follow it, which is an entirely different issue. They confusingly argue that people will not save 10% (average) and therefore those same people should save more than 10%.
Pinyo
August 7, 2007, 11:36

Lazy – Thank you for your insight! You are right of course. These are just shortcuts and do not apply to every situations. The Wealth Rule also doesn’t work too well if you just got a big raise, or lost your job and is now working part-time. It a yard stick, so I wouldn’t recommend measuring inches with it.
Pinyo
August 7, 2007, 12:23

J – thank you for your comment. You are right, that’s basically what the articles said. 10% Rule often fail because people can’t do it consistently or long enough to see it works.
Lazy Man and Money
August 7, 2007, 13:01

This is the last comment I’ll ever leave on your site if you subscribe me by default getting e-mails every time someone leaves a comment.
Pinyo
August 7, 2007, 13:20

Lazy – I am sorry. I have no ill intention. I have turned off the default based on your comment. I didn’t think it was offensive when I set up the plug-in, but appearently it is.
I tried to see if there’s a way to unsubscribe you, but I do not see it from my end.
My apology.
Doesn't see the problem
August 7, 2007, 13:33

It only takes a click of the box to choose your subscription preference.