Investing can seem complex, but there are some tried-and-true rules of thumb that can help simplify decision-making and set you on the path to financial success. Let’s delve into ten essential investing rules of thumb that can guide you through various stages of your financial journey.
What It Is:
The Rule of 72 is a simple formula to estimate how long it will take for your money to double with a fixed annual rate of interest.
How to Use It:
Divide 72 by your annual interest rate to find the number of years it will take for your investment to double.
Example:
If your interest rate is 6%, it will take approximately 12 years for your investment to double (72 ÷ 6 = 12).
What It Is:
The Rule of 114 estimates how long it will take for your money to triple.
How to Use It:
Divide 114 by your annual interest rate to find the number of years it will take for your investment to triple.
Example:
At an 8% interest rate, your money will triple in approximately 14.25 years (114 ÷ 8 = 14.25).
What It Is:
The Rule of 144 helps estimate how long it will take for your money to quadruple.
How to Use It:
Divide 144 by your annual interest rate to determine the number of years it will take for your investment to quadruple.
Example:
With a 9% interest rate, your money will quadruple in 16 years (144 ÷ 9 = 16).
What It Is:
The Rule of 70 estimates how long it will take for your money’s purchasing power to be cut in half due to inflation.
How to Use It:
Divide 70 by the current annual inflation rate to find out how many years it will take for your purchasing power to halve.
Example:
At an inflation rate of 2%, it will take 35 years for your purchasing power to halve (70 ÷ 2 = 35).
What It Is:
The 10, 5, 3 rule gives a rough estimate of expected annual returns from different types of investments.
How to Use It:
Example:
If you invest $10,000 in stocks, you might expect to earn about $1,000 annually, on average.
What It Is:
This rule advises keeping an emergency fund of 3-6 months’ worth of living expenses in easily accessible cash.
How to Use It:
Calculate your monthly living expenses and multiply by 3 to 6 to determine how much you should keep in an emergency fund.
Example:
If your monthly expenses are $3,000, you should have between $9,000 and $18,000 saved.
What It Is:
The 110 Rule is used for asset allocation, suggesting the percentage of your portfolio that should be in stocks.
How to Use It:
Subtract your age from 110 to determine the percentage of your portfolio that should be allocated to stocks, with the remainder in bonds.
Example:
If you are 30 years old, you should have 80% of your portfolio in stocks (110 – 30 = 80).
What It Is:
This rule suggests setting aside at least 15% of your salary for retirement.
How to Use It:
Calculate 15% of your annual income and invest this amount in retirement accounts.
Example:
If your annual salary is $50,000, you should aim to save $7,500 for retirement each year.
What It Is:
The 4% Rule indicates how much you can safely withdraw from your retirement savings each year without running out of money.
How to Use It:
Multiply your total retirement savings by 4% to determine your annual withdrawal amount.
Example:
If you have $1,000,000 saved, you can withdraw $40,000 annually (0.04 × 1,000,000 = 40,000).
What It Is:
This rule helps you estimate what your net worth should be based on your age and income.
How to Use It:
Multiply your age by your pre-tax annual income, then divide by 10 to get your target net worth.
Example:
If you are 40 years old and earn $100,000 per year, your target net worth should be $400,000 (40 × 100,000 ÷ 10 = 400,000).
By following these rules of thumb, you can make more informed decisions about your investments and financial planning. While they provide general guidelines, it’s important to consider your individual financial situation and goals.
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