Financial Hacks

Here are some fancy financial hacks:

• Rule of 72: Gives an estimate of how long it will take to double your investment.

For example, if you expect to earn 10% per year on a $10,000 investment, it will double to $20,000 in about 7.2 years (72 / 10).

• Rule of 114 and Rule of 144: Gives an estimate of how long it will take to triple and quadruple your investments respectively.

For example, at 10%, a $10,000 investment will triple in about 11 years (114 / 10) and quadruple in about 14.5 years (144 /10).

And here’s a personal favourite of mine:

• The Stanley and Danko Formula: A simple formula which tells you what your net worth should actually be or your ‘expected’ net worth.

This states that:

(Your age) x (Pre-tax annual household income from all sources, except inheritances) / 10 = Your "expected" net worth

From there, you're categorized in one of three ways:

1. Under accumulators of wealth (UAWs) are those whose real net worth is less than one-half of their expected net worth.

2. Average accumulators of wealth (AAW) are on par with their expected net worth.

3. Prodigious accumulators of wealth (PAWs) have a net worth twice or more than their expected level.

Let’s take an example to understand:

Priya, 50, has a net worth of $1.75 million and Sonia, 30, has a net worth of $130,000. So this is their actual net worth respectively.

So let’s see what their net worth should be according to the formula:

Priya earns $150,000 a year and has investments that return $15,000 for a total annual income of $165,000. Multiplied by 50 (her age) that's $8.25 million. Divided by 10, her net worth should be $825,000.

So because $1.75 mil is greater than twice of $825000, Priya is a PAW

Sonia, on the other hand, is 30 with a total annual realised income of $95,000. Multiplied by 30, that's $2.85 million. Divided by 10, her net worth should be $285,000. But she's only worth $130,000.

Now because $130,000 is less than one half of $285,000, Sonia is a UAW.

Hope this helps.