Thursday, June 12, 2008

5 Quick Personal Finance Formulas

Being somewhat of a personal finance junkie (Clark Howard & Dave Ramsey disciple) I am always on the lookout for better ways to make decisions with my money. For example, when I'm standing in front of the 1080p flatscreen HDTV at Frys I try to think of what that money would be worth in my retirement account. Or when I'm trying to decide if I should pay someone else to mow my lawn, it helps to quickly calculate my personal hourly payrate.

Money Magazine (Jan2008) had a great little article with 5 quick formulas that you can do in your head to help with questions like this.

How many years will it take to double my money?

72/annual investment return, eg: @ 8% investment return, it would double in 9 years

What am I giving up in retirement savings when I spend money today?

Add a zero to the price tag, if you have invested the money for 30 years, earning a 8% return. So a $10,000 dollar stereo system trims the savings by "$100K".

How do I need to earn, before taxes, to buy what I want?

Multiply the cost by 1.4 (for 28% federal tax rate)

What am I worth by the hour?

Divide your annual pay in half, drop the last 3 zeros. If you make $100,000 a year, you make $50/hour (40 hour week)

Does my fund manager do well enough to justify his fees?

Multiply your fund's expense ratio by 10. The result is the percentage by which it needs to outperform a low-cost index fund to cover the extra fees. A fund with an expense ratio of 1.5% for example needs to do 15% better than the index.

1 comment:

Unknown said...

I am not understanding a question that my friend asked me. I need help with it myself in order to explain how it will work lol...

After a protracted legal case, Tim won a settlement that will pay him $11,000 each year at the end of the year for the next ten years. The market interests rates are 5%. How much should the court invest assuming the end of the year payments, so there will be nothing left in the account after the final payment is made?