Once in a while, you will come across mathematical shortcuts or trick to help you better manage your finances. 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 and see if you know any of these?
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:
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.
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:
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!
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:
Here are some more articles and posts about this rule:
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.
I’d get rid of the Wealth Rule. It doesn’t apply those who are young or just out of school.
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%.
@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.
@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.
So when i use the 120 Minus Age Rule Of Asset Allocation.. my age is 19, i need to invest 101% of my money in stocks and -1% in bonds? That means that i have to create bonds to invest in stocks? LOL