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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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  1. 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.

  2. 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.

  3. 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.

  4. 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.

  5. 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.

  6. […] 2 cool tricks to use: Your hourly rate and The Rule of 72. [I Will Teach You To Be Rich] […]

  7. 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.

  8. William Nevers Link to this comment

    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?

  9. 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 your book deal, but I look back at life and being somewhat older than you, realize, it’s not the money that counts, it’s the experiences.

    And by chiding young people from creating memories, even though it may not be financially wise, you are steering people into caves like your own, spending all your working hours dedicated and obsessed with making money as life passes by your best years

    Money is not everything, it is barely one piece of the puzzle. It makes life comfortable that is about it.

    You are the pied piper for this civilization, obsessed with money, using money as a measuring stick for success, happiness.

    If I come across as sour, yes, that’s probably true, because I see arrogance and a lack of humility, which really indicate much deeper issues at play inside. As a psych major, I’m sure you have far better insight

    But it does astonish me that you’ve had the advantage of superior opportunity and still find yourself focused on the one thing that will not buy you happiness

    Best of Luck, I do hope you figure it out.

    In the meantime, you continue to perpetuate and propage the emptiness of a culture slowly losing character and depth

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