I came across four useful financial calculations that you can perform in your head and thought I’d pass them along. Here they are:
What am I giving up in retirement savings when I spend money today?
This is an easy one–add a zero to the price tag. Assuming you have 30 years to retirement and earn 8% annually on your investments, that $3,000 watch would have been worth $30,000 in retirement if you had invested the money instead. Coming down to earth a bit, the $4 latte (it’s always the latte) purchased 5 days a week costs about $1,040 a year, or $10,040 30 years later in your retirement account.
How much do I need to earn before taxes to buy stuff that I want?
Assuming you’re in the 28% federal tax bracket, multiply the cost by 1.4. That means a $20,000 car costs $28,000 before taxes. Yikes! Of course, this doesn’t account for state tax, social security tax and medicare tax, all of which would take the multiplier even higher.
Does my fund manager’s performance justify his fees?
Multiple the fund’s expense ratio by 10. The resulting percentage is the amount by which the fund needs to out perform a low-cost index fund to justify the fee. Think about that–a fund charging 1% must outperform an index fund by 10%.
What am I worth by the hour
Simply divide your annually salary in half and drop the last zero. If you make $80,000 a year, your hourly pay is about $40/hour.
Source: These calculations came from January’s edition of Money Magazine. In year’s past I never cared for Money Mag. I was tired of reading articles with titles like this: 25 Funds To Buy Now! I can troll the Internet for bad investing advice, so why pay for it? I won a subscription to Money a few months ago, however, and I’ve actually found some useful information in the magazine. Subscriptions start at $19.95/year
And if you want to learn even more calculations you can do in your head faster than most can with a calculator, Click Here!
Rob Berger
Latest posts by Rob Berger (see all)
- 6 Banking Options for College Students - May 21, 2013
- Sunday Morning Roundup: Berkshire Hathaway Shareholder Meeting - May 12, 2013
- KAIKU Visa Prepaid Card Review - May 11, 2013
Published or updated September 12, 2011.
{ 11 comments… read them below or add one }
Interesting. Those are some great tips. I too am a former Money magazine subscriber. I should consider giving it another shot.
“How much do I need to earn before taxes to buy stuff that I want?”
That’s probably the most important one.
Sooo many people don’t know how much they are taxed/how much they pay in taxes.
The best ones are the people who tell me, “I didn’t pay any taxes last year, in fact, they sent me a check!”
People are clueless.
I am surprised that they didn’t mention the rule of 72 — to figure out how long it will take for your investment to double, divide 72 by the interest rate.
Also, 80,000/2; drop the last zero = 4000, not 40. This is another reason why you should not work unpaid overtime. For each hour of unpaid overtime you work, you are reducing your hourly rate.
These are nice finds. Thanks for sharing.
Very useful article. I’ve submitted it to Digg and reddit, hope you don’t mind:
http://reddit.com/info/62yik/comments/
http://digg.com/business_finance/Four_useful_financial_calculations_you_can_do_in_your_head
I really like your perspective on losing retirement money. It’s insane to think of how much money is lost on the most trivial of things.
I’m currently working on post-grad debt, so anything I can find to help me save money is great.
I’m blogging my “adventures,” too; here: http://shauna26.wordpress.com/
Math Dude, thanks for keeping me honest. Of course, after dropping the zero you have to add a decimal. And having worked a fair amount of unpaid overtime in the last month, your comment really hits home for me. By the way, if anybody is into math, check out Math Dude’s website (just click on his name after his comment). Very cool!
Wisebread, very much appreciated. By the way, I like the new look of your site. I read it through my feed, so I just noticed the new look today.
Thanks DR, changing the design was a bit of a risk. I’m glad you liked it. I love the colors of your site as well. It is very soothing.
I know you’re just using Money’s formulas, but I wonder if you could explain the one about the fund’s expense ratio? The expenses are taken out before the performance is calculated. So, if fund A makes 10% with a 5% fee, I get a 10% return. If fund B makes 8% with a 2% fee, I make 8%. I’d rather have the 10%, even if I have paid more for to get it. Or am I misunderstanding how it works?
Jane, great question. The returns reported by funds are net of expenses. You’re correct that a higher expense ratio could be justified by even higher returns. The problem, however, is knowing in advance which funds will do that much better. History tells us that over the long run, high expense funds can’t consistently outperform the indexes. Thus, in the long run, lower expense funds do best. My goal is to keep my expenses for my portfolio below 0.50% on a weighted basis. Some funds cost more, some less, but I want the total cost across all funds to be 50 basis points or less. I hope that helps and good luck!