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Start Here: “The Ultimate Guide to Personal Finance”

2 cool tricks to use: Your hourly rate and The Rule of 72

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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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55 Comments on "2 cool tricks to use: Your hourly rate and The Rule of 72"

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Dylan
Dylan
9 years 6 months ago

I like the Rule of 72 to put inflation into perspective. If you assume 3%, 24 years from now (roughly the amount of time between generations) living will cost twice as much.

Roman
Roman
9 years 6 months ago

Inflation doesn’t matter in this calculation. Just use the real (taking inflation into account) rate of return for your investments. That way you’re walking about the buying power of your money instead of an arbitrary numeric value.

Stormy
9 years 6 months ago

To add inflation to the Rule of 72 just subtract the amount of inflation from the interest rate. So if you expect inflation to be 3% and your interest rate is 10%, you just use 7%. So in the above example, taking inflation into consideration, your money would double in 72/7= 10 years instead of the 7 that was predicted.

James
James
9 years 6 months ago

Roman,

Dylan was using the rule of 72 in a different way…instead of using it to calculate how much an investment will have grown, he was using it to calculate how much money will have inflated.

It works on exactly the same principle, and I think is interesting to note that, on average, in 24 years everything will cost twice as much due to inflation.

Willie
Willie
9 years 6 months ago

Neat tricks. Great for small talks at the dinner table. It completely baffles the mathematic wiz when I make that kind of claim without the proper proof. It’s amusing to see him working out the math in his head.

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[…] 2 cool tricks to use: Your hourly rate and The Rule of 72. [I Will Teach You To Be Rich] […]

JW
JW
9 years 6 months ago

If you believe in the whole “Siegel’s Constant” thing, you can expect real (inflation-adjusted) returns on that index fund to be closer to 6.5%, so maybe double the value of your future gift every 11 years instead of 7, giving her $64,000 at age 66. Not quite as impressive, but still one heck of a gift.

William Nevers
William Nevers
9 years 6 months ago

I love it, thats encouraging. Such a great gift idea thats what I’m going to do for people I know!
What could be a better gift right?

Sunil
Sunil
9 years 6 months ago
Ramit, I have to congratulate you on taking what are obvious ideas and turning them into a marketing goldmine. What I’m surprised is how many people value the information you provide, which is common sense at best. But common sense is sometimes the least common commodity of all. But I wonder if it is the 20 year olds that are splurging at Christmas the idiots, or the 20 year old Scrooge who’s advising them to cook at home, spend less and not enjoy the best years of their lives. I have money, more than the $2mil you just got for… Read more »
Sunil
Sunil
9 years 6 months ago

It’ll be interesting to see if you have the guts to post a comment that offers an opinion differing to yours

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9 years 6 months ago

[…] 2 cool tricks to use: Your hourly rate and The Rule of 72 (tags: money future advice tips) […]

Carlin
Carlin
9 years 6 months ago
Apparently, if you decide to plan ahead and save money, you’re missing out on life. I never realized I had to spend every dime I make so that my life was worthwhile. Also, I believe the $2 million was venture capital money for his business, not his book deal. It’s interesting how you despise using money as a measuring stick, but you feel the urge to mention you have more than Ramit, as if it will validate what you’re about to say, give you some sort of authority. It’s also obvious you haven’t read a good portion of his posts.… Read more »
Nas
Nas
9 years 6 months ago
Responding to Sunil’s comment. I live in a city that has the worst overall credit scores in the nation. I wish everyone here read Ramit’s site. Hell if I could, I’d post a billboard advocating http://www.iwillteachyoutoberich.com. As a young, recent college graduate, I have found Ramit’s site tremendously helpful. Dealing with personal finances can be intimidating, especially to women. Ramit makes the topic approachable and uses anecdotal humor to make it fun. I don’t think he is steering people into caves at all. He’s creating a forum that addresses basic, important points that bring people together. He talks about simple,… Read more »
Sunil Sharma
Sunil Sharma
9 years 6 months ago

Iwillteachyoutoberich.com reminds me more of richjerk.com than it does StevePavlina.com

If your posts are helping readers, I wish you the best.

Me, myself and Money
9 years 6 months ago

I think Ramit is doing an absolutely amazing job educating people about personal finance. I’ve learned a lot just by reading his posts. I don’t know what problem this Sunil guy has. But great job Ramit!!

Jonathan
9 years 6 months ago

Sunil, your comment was full of assumptions.

Telling people to spend their money wisely and try to invest for the future is not hurting their college or life experiences. In fact, because I manage my money well, I can do MORE with my life than others.

Ryan
Ryan
9 years 6 months ago
That’s really unfortunate to see comments like the one above. It is precisely Ramit’s unflappable dedication to seeing beyond the bottom line that has kept me coming back to this site. He’s repeatedly invited readers to really evaluate their goals and what to do with their money. And the post about kiva.org should be proof positive that that’s the case. Besides that, there are a lot of people who obsess about money. Most of them aren’t smart enough to come to this site. Most of them obsess about getting raises and change jobs based on salary rather than fulfillment. Money… Read more »
Sri
Sri
9 years 6 months ago

Sunil,

U have over US$2 million??? Give me some….i know a good way to make more 🙂

Kiyasaki once said…if you have $25,000….the first thing you do is shut up.

Blair Christopher
9 years 6 months ago

Ramit,

Never mind what Sunil as said. It is quite obvious that this person is either a new reader or just does not comprehend your advice. You pound into our heads this “sexy vs. smart” idea and honestly, it has nothing to do with materialism as this person assumes. Quite the opposite in fact.

Be smart, calculating about your financial future and enjoy the life you live right now. That is essentially what I get from your site.

S
S
9 years 6 months ago
Thanks to Ramit, I have stopped just thinking about it and have actually done something about my investment accounts. As a result have been more at peace about my financial status than ever before. I am also leaving the country for two weeks on vacation because I saved the money to be able to leave the “cave” and to start “creating experiences” – experiences that will increase the depth of my character. And guess what? Ramit has helped me with that personally. (Thank you.) I know I’m not the only one who has been affected for the good by Ramit.… Read more »
How to start a clothing line from scratch

thats a cool little trick calculating your annual salary never heard of it …until visiting this site.

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[…] 13th, 2007 I Will Teach You To Be Rich has a simple and useful summary of two rules of thumb that are very useful in the personal finance world. I would highly recommend reading, […]

J
J
9 years 6 months ago
I don’t totally understand Sunil’s point or how it applies to Ramit, but I am familiar with the rhetoric. It’s easy for some people to believe that not spending money while young=not having desirable experiences and/or having an unhappy sheltered life. Even though there are a lot of counter examples to this logic (Peace Corps, Full Bright Scholars, etc.), it seems easy to accept based on the values we hold. I mean, the guy who parties every night HAS to be more fulfilled than the guy who sits at home reading library books, right? The guy who has the big… Read more »
Roy
Roy
9 years 6 months ago

Sunil is a sour grapes kind of dude. He doesn’t like to hear financial responsibility and equates it to “old stick in the mud” rhetoric. Oh well, his loss.

Andrew
Andrew
9 years 6 months ago

What amazes me is the fact the Rule of 72 was first “thought of” by Benjamin Franklin, yet it is not taught at schools.

My father is a retired banker, and I was talking to him about the rule – last year sometime. His response was “Oh yeah, we used that in the bank all the time”.

I said to him, (slightly peeved) that I wish he had taught it to me 20 odd years ago, when I was first starting to save money and be more financially aware. I was not a happy person with him for a while.

Andy
9 years 6 months ago

Ramit is one of the least arrogant financial advisors that I’ve seen on the web, which is why I like this site. It’s advice like “Save a little of your money when you’re 20. You might want it when your 30 or 50 or 80 or 110” that more people need to follow.

Still, some of these posts seem pointless. I mean, who’s calculating their finances on the back of a napkin? Is it so hard to work out $20/hr * 40 hr/week * 52 weeks/yr? People don’t like to use the compound interest formula?

Carlin
Carlin
9 years 6 months ago

Don’t hate the player. Hate the game man. Hate the game…

Richie
Richie
9 years 6 months ago

I liked your ideas Ramit.If you have anymore bright ones, please let us all know.For the rest of the sourpuss kinds:If you cant see this as wisdom or even as a kinda help,browse some other page on kids cartoons.Real life IS more serious than meets the eye.Ramit is not asking you to retreat to a cave and just worry about money.But when you do think of managing your money, maybe this will come to your mind.

James
James
9 years 6 months ago
These are sound principles. I have been practicing them for 15 years and can use myself as an example. I’ve never made more than a school teacher but I’ve been pretty diligent about saving as I went along. About a month ago my net worth passed $1 million. I say that not to brag, but to tell you that you can have all that you want and with some discipline you can achieve peace of mind knowing that you don’t have to rely on someone else to take care of you. It ain’t ‘easy’ as in winning the lottery, but… Read more »
Alex
Alex
9 years 6 months ago

I thought of this while I was half asleep this morning – On the rule of 72 – what if you get a 72% rate of return – it will take you 1 year to double your money? Is this assuming monthly compounding?

frank
9 years 6 months ago
i give ramit major kudos for responding to mr. sunil so politely. a class act for someone who probably “stabbed himself in the eye with a katana” when he read the comment. :oP :o) “It’ll be interesting to see if you have the guts to post a comment that offers an opinion differing to yours” uhhh… yes… it definitely *would* be interesting to see *anyone* post a comment that offers an opinion differing from their own… being that most people post their own opinions… especially as a *response* to an opposing opinion. sunil, i would be interested in your thoughts… Read more »
local shopper gordon
9 years 6 months ago

I love your informaiton about how to be rich. i also enjoy your web2.0 logo.

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9 years 6 months ago

[…] 2 cool tricks to use: Your hourly rate and The Rule of 72 (tags: 72rule money savings investing finance) […]

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[…] I Will Teach You To Be Rich » 2 cool tricks to use: Your hourly rate and The Rule of 72 Mental arithmetic shortcuts (tags: money finance maths) […]

Chris
Chris
9 years 6 months ago

I can not seem to get that first one to come out correctly. $19/hr x 2 = 38 so 38000. Assuming a 40 hr work week @ $19/hr = 36480/ year. Did I make a mistake?

Kevin Hoang Le
9 years 6 months ago
On my first day of my first job right after college, I learned your trick #1 from an HR staff at my first company, and have never forgotten since. You made a mistake by menitioning about taxes in the last sentence of trick#1. It’s not the taxes. You pay the same the amount of taxes in either cases because you would be in the same tax bracket. Just to clarify to some readers, that trick #1 is only an approximate. The reason for the approximate is most of us work 40 hours/week, about 50 weeks/year. Most start with 2 weeks… Read more »
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[…] out comments #9 and #10, then the responses from other iwillteachyoutoberich readers. Thanks, […]

chris
chris
9 years 6 months ago
In response to the rule of 72 comment, and the person who asked if it would take 1 year to double your money assuming a 72% return, the rule of 72 provides a pretty close estimate to how much time it takes to double your money. So it’s not an exact measure. One of the caveats is that it only works for more “realistic” numbers, if you want to call them that, but basically once you get into pretty high rates of return the estimate stops being quite so accurate. If you want an exact formula, divide the natural log… Read more »
From Bitch to Bull
9 years 6 months ago

Geaux Tigers !

Geaux Ramit !

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[…] Ramit Sethi is great. He has a handy tool for freelancers or hourly workers: To Figure out how much your hourly rate translates into per year, or how much you make per hour from your annual salary. […]

Enrique
Enrique
9 years 6 months ago

Sunil:
You got the attention you were craving. It is time to move on.
If someone is interested in calculating the compound interested with taxes and inflation, cnn has a calculator.
1)Go to http://www.cnn.com
2)Press on Business section
3)Press on REAL ESTATE
4)You will see calculators
5)Choose the one that says about compounding.
Enrique
em99_9@yahoo.com

pfodyssey
9 years 6 months ago

I think everyone understands / appreciates the underlying message Sunil is trying to communicate (another version of smell the roses?). Unfortunately, it’s drowned in his personal, vitrolic posting. Although a newer reader to this site, I appreciate the content being made available from all the contributors (Ramit and readers alike). Whether we all agree with the various suggestions / recommendaion is irrelevant…it’s the discussion / thinking that counts. Sunil has added his own perspective to that…perhaps just not in the most effective way (if he wants to be heard). Onward!

jag - whyyouarenotrich.com
9 years 6 months ago

Thanks Enrique for posting the compound calculator.

I cannot find it in cnn.com. May be they have removed it.

I found one here
http://www.moneychimp.com/calculator/compound_interest_calculator.htm

Anyway thanks for your posting

Milind
9 years 6 months ago
Sunil, After reading your comment, I was overcome by emotion so overwhelming that it compelled me to write to you. I would bet $25 that, like many Indians and Indian Americans, you were raised by extremely frugal parents. They frequently denied you “splurging” experiences that were enjoyed by your friends and many others around you. They trained you to deny yourself such experiences. This left you with resentment and regret so deep that the bitterness has utterly blinded you to the following: • The financial difficulties your parents likely went through or observed, to learn frugality. • The likelihood that… Read more »
nomes
nomes
9 years 6 months ago

Sunil is an ass. Since reading Ramit’s blog I have amassed £15000 in pure savings with my only debts now being my mortgage and student loan. IA hearty thanks from me Ramit.

Maxim
9 years 6 months ago

it’s a neat trick, but breaks down at later periods. if you were to compound $1000 at 10% [1000(1.1^63)] = $405k, not the $512k indicated by this trick – a significant. it’s easy, but the “proper” way only takes a simple calculator. heck, i did it on my cell phone 🙂

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[…] I Will Teach You To Be Rich » 2 cool tricks to use: Your hourly rate and The Rule of 72 (tags: money Finance tips investing lifehacks advice career howto) […]

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[…] a couple of “cool” personal finance tricks I saw at http://www.iwillteachyoutoberich.com (they got a bunch of cool personal finance tips there): 1. Figure out how much your hourly rate […]

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[…] So, in the spirit of being overly competitive with small amounts of information, I decided to try to guess the difference between her income and the amount her firm bills her out at. For example, if her salary comes out to $25/hour and her firm bills her out at $100/hour, the answer would be 4x. (How to calculate your hourly wage from your annual salary.) […]

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[…] I Will Teach You To Be Rich » 2 cool tricks to use: Your hourly rate and The Rule of 72 72/[return rate you’re getting] = # of years to double your money. (tags: finance Money) […]

Holla Back
Holla Back
9 years 3 days ago

I love Sunil…he is my idol…that shit is true wat he says….fuck the free world…spend all the money in the world

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[…] Ramit Sethi of IWillTeachYouToBeRich explains the rule of 72 is a cool trick to see how fast your money will grow […]

Taylor Hill
Taylor Hill
7 years 6 months ago

Thanks for helping to educate ordinary folks like me as to how to better manage and put to work the financial resources that we already have access to (without having to be day-dreaming about winning the lottery the rest of our days on earth)!

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[…] your basic curriculum the most important rule of all after learning how to balance that checkbook. The Rule of 72! It is a very versatile tool that I use quite often to help me make quick estimates on […]

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