Here are 5 quick formulas to help you quickly answer some common money and investing related questions:
Q1. How many years does it take to double your money?
A1 – Known as the rule of 72. Divide the number 72 by your estimated annual return. So for example, if you expect to earn 9% annually, it will take eight years (72/9), to double your money.
Q2. What am I giving up in retirement savings when I spend money today?
A2 – Add a zero to what you spend if you are going to retire in 30+ years (assuming 8% return on your savings). Divide the number by 1.5 for every 10 years you get closer to retirement. For example, if you are going to retire in 30 years, spending $1000 today is equal to $10,000 in 30 yrs. If you are going to retire in 20 years, $1000 today is equal to approximately $6,666 ($10,000/1.5) in 20 years.
Q3. How much do you need to earn, before taxes, to buy what you want?
A3 – Multiply the cost by 1.4, assuming you are in the 28% tax bracket. Reduce by about 0.1 for every lower tax bracket. So for a person in the 28% tax bracket, to pay for a $5,000 HDTV, you must earn $7,000. This is a good formula to apply when telling your significant other to cut down their spending!
Q4. Is my mutual fund charging me too much in fees and/or what should I be paying?
A4 – Multiply your funds expense ratio or management fee by 8. The result is the percentage by which it needs to outperform a low-cost index fund to the cover the fees. So a fund with an expense ratio 1.5% would need to do 12% better than the index to justify the fund managers fee. If the Dow Jones index returned 15% in one year, your fund should have returned (capital gain and distributions combined) 27% in that year.
Q5. What am I worth by the hour?
A5 – Divide your annual pay in half and drop the last three zeros. So if you are on a $100,000 a year salary, you make approximately $50 an hour.
Please note these formulas should only provide a high-level guide and not assumed to be 100% accurate.