2 cool tricks to use: Your hourly rate and The Rule of 72
March 12th, 2007 - 55 Comments
Here are two tricks you can use to impress friends at parties. What’s cooler than talking personal finance!!
1. Figure out how much your hourly rate translates into per year, or how much you make per hour from your annual salary.
To find your annual salary, just take your hourly rate, double it, and add a thousand to the end. If you make $20/hour, you make approximately $40,000. If you make $30/hour, you make approximately $60,000/year.
This also works in reverse. To find your hourly rate, divide by two and drop the thousand. So $50,000/year becomes approximately $25/hour.
This is based on a general 40-hour workweek and doesn’t include taxes, but it’s a good general back-of-the-napkin trick.
2. The second trick is the Rule of 72, which tells you how long it takes to double your money. 72/[return rate you're getting] = # of years to double your money. For example, if you’re getting a 10% interest rate from an index fund, it would take you approximately 7 years (72/10) to double your money. In other words, if you invested $5,000 today, let it sit there, and earned a 10% return, you’d have $10,000 in about 7 years. And it doubles from there, too. Of course, you could have even more by adding a small amount every month using the power of compounding.
To give you an example of how much money that would be, one of my friends will probably have a baby in the next couple of years. I was thinking I might put away $1,000 as a gift in an index fund. Yes, I am a sentimentalist. Let’s just assume it earns 10% annualized during the child’s life. Guess how much it would be worth?
Age 1: $1,000
Age 7: $2,000
Age 14: $4,000
Age 21: $8,000 (this is where I break in and tell her not to spend it on her Spring Break trip to Cabo)
Age 28: $16,000
Age 35: $32,000
Age 42: $64,000
Age 49: $128,000
Age 56: $256,000
Age 63: $512,000
Basically you can see that little Annie would be rolling hard thanks to Uncle Ramit’s $1,000 gift 60 years prior. As Celine Dion said, “My heart will go on.” Indeed.
And it grows from there–note how fast the money grows towards the end. Yes, this is a simplistic model that assumes a 10% return rate and yes, it leaves out inflation/taxes. But it shows you how much a $1,000 investment can grow with time–even though you don’t add a penny to it. The critical factors are time, minimizing fees/taxes, and picking sensible, long-term investments. What are you going to do today?
[Update]: If you’re a new visitor from Delicious or Lifehacker (or someplace else), here’s a list of popular posts on personal finance and personal entrepreneurship from the last 2.5 years of this blog.
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