# 18 Financial Rules of Thumb and Money Math Tricks

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Once in a while, you will come across mathematical shortcuts or trick to help you better manage your finances. Here are some cool financial math tricks and rules of thumb that I know. These are pretty common so that you may know them already. Take a look and see if you know any of these?

A word of caution, these are just quick ways to help you make educated guesses. These rules work well to a certain limit, but they are not one size fits all. Your situation might be just outside of the range that these rules work well in. Always, take a more in-depth look at the decision you’re making and don’t just rely on these quick math tricks.

### 1. Rule of 72 to Double Your Money

The rule says that to find the number of years required to double your investment, you 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%.

### 2. Rule of 115 to Triple Your Money

This rule is very similar to the Rule of 72. 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. The 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.

### 4. The Larry Swedroe 5/25 Rule for Portfolio Rebalancing

From his book Think, Act, and Invest Like Warren Buffett, Larry Swedroe suggests that an investor should rebalance the portfolio whenever the allocation changed by an absolute amount of 5% (e.g., from 40% to 45%) or by a relative amount of 25% (e.g., from 6% to 4.5%).

For example, any of these situations would trigger a rebalancing:

• A 35% allocation drops below 30%
• A 40% allocation increased above 45%
• A 5% allocation dropped below 3.75%
• A 10% allocation increased above 12.5%

### 5. Wealth Rule from The Millionaire Next Door

I previously discussed this in my post, Are You Wealthy? U.S. Net Worth by Age and Income, 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 that, you are indeed on your way to becoming wealthy! Stanley and Danko call them Prodigious Accumulator of Wealth or PAW

### 6. The 10% Rule of Saving for Retirement

Save 10% of your salary every year, and you will have enough money for your retirement. There is a lot of debate about this one as you can see from the links below. 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, childbirth, sending your kids to college, etc.?
• You save at least 30 years before retirement — did you start early enough?
• You invest the money you saved and getting at least the market rate of return

To be safe, I think it is better to go with what Dave Ramsey suggests and save 15% of your income toward retirement.

### 7. The 80 Percent Rule for Retirement

There is also a popular rule of thumb among financial planners that estimate your retirement income equal to 80% of your current income will give you a standard of living that is substantially similar to what you are experiencing now.

You can use this rule to determine your retirement income amount quickly, but don’t forget to factor in inflation!

### 8. The Multiply By 25 Rule for Retirement

The Multiply By 25 Rule tells an investor how much he needs to save to generate an income stream of a specified size. Say that you need an inflation-adjusted \$50,000 to live on in retirement. The Multiply By 25 Rule tells you that you need to save \$1.25 million to meet your goal (\$50,000 times 25 equals \$1.25 million). See

### 9. The 4 Percent Rule for Retirement

The 4 Percent Rule tries to address the question of how much a retiree can withdraw from his or her retirement account without risking it running out before a 30 years period. The study that resulted in this rule assumed a 7% average annualized return and accounted for stock market volatility to come up with the 4% figure as a safe amount.

### 10. 1.4x Investing vs. Debt Pay Down Rule

The rule helps you decide between paying down debt vs. investing your money. If you are relatively sure that your investment return will be 1.4 times higher than the interest you’re paying, then investing might be a better choice. For example, if you have 5% interest debt, you have to earn at least a 7% return from your investment to make it worthwhile.

Here’s the chart

 Debt Pay Down Investing 2% 2.80% 3% 4.20% 4% 5.60% 5% 7.00% 6% 8.40% 7% 9.80% 8% 11.20% 9% 12.60% 10% 14.00%

Here’s the logic. Most people have to pay 15% federal capital gains tax, plus about 5% state tax on their investment, so \$1 saved is about the same as \$1.25 that you have to earn from investing to make them even. But paying down debt is a 100% guaranteed return on investment, whereas investing risk goes up as you push toward a higher yield — thus the 1.4 times.

Also, since the Stock Market average annualized return is about 9%, this rule shows you that you’re always better off paying down debt with 6.5% or higher interest rate.

### 11. The 50/30/20 Rule for Budgeting

This rule gives you a budgeting guideline as follow:

• 50% of your income goes toward essential expenses like your housing expenses, food, etc.
• 30% goes toward discretionary expenses like entertainment, cable TV, etc.
• 20% goes toward your financial goals like retirement savings, paying off debt, etc.

My opinion is if you have any bad debt, the 30% should go toward that first…no entertainment for you!

### 12. The 20/4/10 Rule for Car Payment

This rule has the following components:

• Put 20% down on your car purchase. This way, you are not upside down when you drive it off the lot
• Pay the car off in 4 years. Again, so that you do not owe more than what the car is worth
• Your total household transportation expenses should not be more than 10% of your household budget.

### 13. The 3 Times Rule for Home Price

This rule states that your home price should not be more than 3 times your annual gross household income.

For example, if you earn \$40,000 a year and your wife earns \$60,000 a year, your household income is \$100k. This means you can afford a home that costs up to \$300,000.

### 14. The 1% Rule for Refinancing

This rule states that the interest rate should be at least 1% lower than what you are paying on your current mortgage before you even consider the option of refinancing.

The decision to refinance is quite involved, so it doesn’t mean that you automatically refinance whenever the rate drops by 1% or more.

### 15. The First Year Salary Rule

This rule states that you should not take on more student loan debt than what you expect to earn in your first year.

Considering the cost of education, I think this rule only works if you go to public school.

This is 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 annual income will be approximately \$40,000. Neat!

### 17. The 6-Month Emergency Fund Rule

This rule states that you should have 6 months worth of expenses saved up in your Emergency Fund.

### 18. A Dollar Saved is \$1.55 Earned

Each additional dollar you earned is taxed at your marginal tax rate, along with state income tax, social security tax, and Medicare tax. This works out to be about 36% tax for most Americans, meaning you’d have to earn \$1.55 to have one dollar in your pocket.

\$1 ÷ 36% = \$1.55

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

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16 years ago

I’d get rid of the Wealth Rule. It doesn’t apply those who are young or just out of school.

16 years ago

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
16 years ago

@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.

Christiaan
14 years ago

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

## 18 Financial Rules of Thumb and Money Math Tricks

by Pinyo Bhulipongsanon time to read: 6 min
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