
43 Comments
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Roman
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.
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Stormy
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.
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James
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.
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Willie
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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Nas
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 https://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, day to day changes that can make big differences in individuals' lives. He advocates the importance of life balance while making modest, long term goals. Ramit introduces his readers to extraordinary people, and encourages independent thinking. Most importantly, what separates this site from others: He is genuine (or at least he appears to genuinely care). Ramit, keep on writing! I think you've figured it out!
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JW
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.
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William Nevers
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?
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Sunil
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
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Sunil
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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Carlin
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. I see your point, but unfortunately it doesn't apply to this site. Do some research.
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Sunil Sharma
Iwillteachyoutoberich.com reminds me more of richjerk.com than it does StevePavlina.com If your posts are helping readers, I wish you the best.
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Me, myself and Money
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!!
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Jonathan
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.
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Ryan
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 enslaves. This site is about making money work for you and finding a way to use improve your quality of life and the lives of those around you (whether it's your friend's new daughter or an business owner in Guyana).
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Sri
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.
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Blair Christopher
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.
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S
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. I have NEVER got the impression that Ramit is about money equalling happiness, and that is why this is about the only blog I read regularly. Not to mention that he is willing to post negative comments to maintain his integrity as a blogger. Good for you Ramit, for creating this site, and for sharing it with us. Cheers.
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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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J
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 TV and all the video games HAS to be more fulfilled than the guy who has no TV at all, right? The guy who blows money on a big steak dinner HAS to be more fulfilled than the guy who cooks himself a humble vegetarian dinner at home, right? The gal who shells it out for designer clothing and fancy gym memberships IS a lot better off than the gal makes her own clothes from thrift store cast offs and does yoga on her living room floor, right? There are those who argue that not being fulfilled in THOSE ways is psychologically freeing--but those people are quickly labeled as fringe elements and we mock them, right? Lovely downward comparison. But there is a lot of good non-fringey sense linking good financial habits while young to overall life fulfillment. At the moment, I'm reading Elizabeth Warren's Two Income Trap. The book examines families that have filed for bankruptcy in the early 2000's. She says that the #1 predictor of going bankrupt in the US is having a child and that more children in this country will experience bankruptcy than will experience the divorce of their parents or the death of someone close to them of either heart disease or cancer. She says that American middle-class families are loosing their safety nets of savings, affordable insurance and the controversial reserve worker. She says that over consumption among these families is a myth and that the average family has less than two months of expenses in the bank at any given time. She points to financial concerns as a major contributing factor to suicide, depression, spousal/child abuse, and a host of other societal ills. If what she says is true, then the time to fight against these things is while you're young. Your savings at the age of 22 can function as a safety net when you lose your job at 33 and you have to pay the mortgage. If worse comes to worse, you can cash out the investments you made at 23 to pay for a life saving surgery your kid needs when you're in your forties. By being financially smart now, you're building safety nets for later and giving yourself a sense of security and peace of mind that may eventually make you a better person and prolong your life. And I'm glad Ramit doesn't sound like Steve Pavlina. Ick.
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Roy
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.
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Andrew
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.
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Andy
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?
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Carlin
Don't hate the player. Hate the game man. Hate the game...
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Richie
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.
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James
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 looking back it wasn't hard, either I've learned to be disciplined in my spending and still have a good time in life. Here's what I would add to the list: - Insurance. It gets a bad rap, but as your wealth grows you owe it to yourself to protect it. So get a decent life policy (more as your famliy grows); get disabilty insurance so that if you're disabled you can live the rest of your life with some dignity and security; liability insurance seems odd, but again you are thinking big and of the future, don't let someone make off with your wealth if you have an accident. A $1 million umbrella policy costs about $100/year - a will. Don't burden others if you get hit by a bus. Be smart and they'll love you even more - Diversify. A good rule of thumb is to buy mutual funds and bonds in a variety of risk categories. Take your age and subtract it from 100. That's a good starting ratio for your mix of stocks and bonds, thus if you are 20 years old, you'd have 80% of your portfolio in stocks - Buy regularly. The best method is dollar-cost-averaging which is a fancy way of saying 'always buying the same amount no matter what'. It's as easy as setting up an automatic withdrawl from your paycheck or bank account. The reason that it works is that you're always buying, and when the market is down (ie. when you'd naturally be afraid to buy) your auto withdrawl makes the purchase for you-- and guess what? You actually got more for your money than you did last month when the market was 'up'. Think about it. - Always, always always put the maximum into your 401k that is matched by your employer. It's FREE MONEY! A couple of additional thoughts. When I was getting started there was a book called The Wealthy Barber. You can get it used on eBay for $5. It is about 50 pages and it has informed my investing strategy since day one. Trust me on that. Finally, take an interest in your future. Read The Motley Fool. Listen to radio shows where people ask about money, investing, real estate and wealth. Challenge yourself to think about what you hear. But if you get one thing from this promise me that you will ignore the FUD (fear, uncertainty and doubt) from the mainstream media media that says anything about investing, the markets, real estate values or ANYTHING about money. They are invariably WRONG and any advice you take from a reporter will be detrimental to your wallet. Why? Because they will present to you that a 200 point loss in the stock market is bad when the opposite is demonstrably true. If you are buying through dollar cost averaging and are not cashing out tomorrow, a down market is to your advantage. If you are not selling your house, a falling market means nothing to you. If you are buying a house a falling market is a godsend. Get it? Now please. Don't take my word for all of this. Think about it, learn about it and act. The sooner you start - I promise- the sooner you will be able to stop worrying about money. Thanks for listening
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Alex
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?
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frank
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 on enjoying life. i look forward to visiting iwillteachyoutobehappy.com . otherwise, you may want to try iwillteachyoutonotcriticizebasedoncompleteassumptions.com
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Chris
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?
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Kevin Hoang Le
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 vacation/year. Thus, most of us work 2000 hours/year. Again, this is ONLY an approximate because as we gain seniority or re-negotiate, we get more vacation. Don't use that formula to compare between a consultant/contractor who bill hourly rate vs a fulltime permanent employee. Reason is simple: health, insurance benefits, 401K etc.
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chris
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 of 2 by the natural log of (1+ the rate of return in mind). So assuming a return of 10%, compute ln(2)/ln(1.10). Just plug it in on your calculator...
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Enrique
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 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
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pfodyssey
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!
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jag - whyyouarenotrich.com
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
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Milind
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 it was a conscious choice on your parents’ part to teach you, from a young age, to deny yourself “splurging” experiences • The numerous financial catastrophes you avoided by practicing frugality, catastrophes that are worth some resentment and regret to avoid • The critical role played by frugality in your amassing your own wealth • The long-term financial difficulties faced by those who habitually enjoyed “splurging” experiences from a young age • The tragic absence of education to help young people make wise personal finance decisions. • The excellent personal finance education, geared toward young people, provided by Ramit in his speaking engagements, newsletter, and blog. • The deeply informed reasons Ramit provides for frugal habits. • The distinction Ramit repeatedly draws between financial net worth and “being rich” • The numerous examples Ramit provides of people who may look like they are splurging but who are actually making informed investments in their own happiness. • Ramit’s commitment to using his assets to help others. • The good humor with which Ramit pokes fun at examples of excessive frugality. Your blindness to these obvious facts suggests that you are overwhelmed by resentment and regret. In Ramit, you see only your own deficiencies. For this, I pity you. Here is a prescription to rid yourself of these demons: • Accept that some experiences are lost forever, and move on. To help you, think of people who had even fewer good experiences than you. • Enjoy splurging experiences that were denied you at a young age. Buy the biggest ice cream sundae on the menu, or buy the most expensive Disney World experience. You will find yourself rapidly and cheaply satisfied. • Treat some one else to such experiences. • Fund an enterprise that helps others by providing wealth, employment, education, or financial aid. You will find yourself liberated and spiritually enriched by the practices of the very person you deride. Unlike you, I wish Ramit continued success in his ventures. May his wealth surpass our own when he reaches our age.
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nomes
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.
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Maxim
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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Holla Back
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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Taylor Hill
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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Bob Donaldson
Ramit !!!! Thank you sooo fucking much for this..... I do pretty good right now, I'm 60, pulling in about 300/350k a year. and I'm just now releasing an on line leadership training program that's a bit different than most you see.....I employ 4 of our six kids, and my grand babies enjoy the company of the their mothers because my daughters work from home... My family and friends consider me quite the success...why you might ask what is my scent of success? I was never paid an "allowance." We had a big family and when I went to school I learned that other kids got free money or money doing chores, chores i was doing already. I thought wow awesome. When I talked with my Dad he told me that he knows about kids getting allowances and then proceeded to inform me thats not what we do in this house. If you want money you will have to go earn it......and thats what I did ...starting at 6, for a lifetime..... mowing lawns, yard work, newspaper route for 6 years building up a route nobody wanted, my first failed business at 12..... later I ended up a full time single dad with three daughters while managing a 24 department at the same time.. ..did they get "allowances" - nope. they got jobs..... now in there early 30s with their own kids and they all kick ass...all with degrees, a bachelors and masters and a phD thrown in there .... bottomline: they know how to be effective in the world in which they operate.....because while they received unconditional love for free everything else had to be "earned" you know the joe DiMaggio story? : As the story goes, a journalist was interviewing DiMaggio at his home and asked him what it felt like to be such a “natural hitter.” Without saying a word, he dragged the reporter downstairs. In the shadows of the basement, DiMaggio picked up a bat and began to repeat a series of practice swings. Before each swing, he would call out a particular pitch such as “fastball, low and away” or “slider, inside” and adjust his approach accordingly. Once he finished the routine, DiMaggio set the bat down, picked up a piece of chalk, and scratched a tally mark on the wall. Then he flicked on the lights to reveal thousands of tally marks covering the basement walls. Supposedly, DiMaggio then looked at the journalist and said, “Don't you ever tell me that I'm a natural hitter again.” Take good care !! Bob
Comments are closed.
Dylan
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.