Handy financial rules of thumb

Here are few cool things that will make you look like a financial voodoo. I use these frequently to do quick math in my mind without searching for a calculator. You can find more detail information on these rules and learn more tricks if you search internet. To make understanding easy I did not consider few facts like annual inflation, taxes, fees etc in the examples.

1) How to quickly calculate hourly rate based on annual salary?

There are 52 weeks in a year and 40 working hours in a week. This translates to 2080 working hours per year. Let's keep 80 hours for holidays, sick leaves, vacations etc. That leaves us with 2000 working hours per week. If your annual salary is $60000 just divide this number by 2000 to quickly calculate hourly rate. If you know your hourly rate use this trick in reverse to calculate annual salary.

Here is an example:

Case 1 (Calculate hourly rate from annual salary)

                Annual Salary: $60000

                Hourly Rate: Annual Salary/2000 hours = $60000/2000 = $30

Case 2 (Calculate annual salary from hourly rate)

                Hourly Rate: $30

                Annual Salary: Hourly Rate*2000 hours = $30*2000 = $60000

2) Rule of 72 (or 115) trick

Rule of 72 is about doubling your money. This trick quickly tells you how long it will take for your investment to be doubled based on your rate of return. Let's say you invest $10000 in an index fund which guarantees 10% return on investment every year. Divide 72 by 10 and the result is the number of years it will take for your investment to grow to $20000. Like the first trick this can be applied in other way as well. If you want to know what rate of return you should expect to double your money in 7 years, just divide 72 by 7.

Here is an example:

Case 1 (Calculate in how many years your investment will be doubled)

                Annual Rate of Return: 10%

                Investment doubled in: 72/10 = 7.2 years

Case 2 (Calculate how much your annual rate of return should be)

                Investment to be doubled in: 8 years

                Annual Rate of Return: 72/ (8 years) = 9%

Extend this thinking further and imagine investing $1000 today in a fund which provides 10% annual return yearly. After 7.2 years it will become $2000 and after another 7.2 years it will become $4000. Fast-forward 35 years and you will have $32000. Quite a big reward without even lifting a finger.

Similarly Rule of 115 is all about tripling your money.

3) 10% retirement savings rule

We often think about how much to save for retirement. It is hard to consider all the facts and guesstimate how much one would need for retirement. To make things easy financial experts recommend 10% rule as a safe bet. This means save 10% of your salary every year and you will have enough to maintain the same lifestyle after retirement. To make this rule work you will have to start saving at least 30 years prior to your retirement. This rule is very often debated in the financial world.

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