financial zen

The Rule of 72 has been mentioned on Personal Finance blogs before - and by no means should we forget it!

This simple rule is how long it would take your money to double at a given interest rate by dividing the interest rate into 72. The link above is to a handy calculator if you don’t think you can handle the math (and when you are dealing with 5.06% interest, it’s understandable you may need some help!). Initially, it seems like a pointless calculation - unless you start hearing people discussing doubling your money (or you’re wondering how much interest you’ll be needing in order to double your money by a certain time - maybe you’re saving up for a vacation, a car, or something similar?)

I’ll be revisiting this rule in the near future!

When weighing job offers, you have to weigh multiple factors into the job offer. For instance, let’s say your salary averages out to $29/hr (how did we get that? Let’s take a salary - $60,000/year, divided by 52 weeks in a year, divided by a 40 hour work week = Our hourly rate, rounded up). That’s assuming our employer pays for insurance, medicade, 401k, etc - and with that we can say it averages to $36/hr).

When we compare a job offer from city A to city B, we can use a formula to determine whether the increase (or decrease) in salary actually is worth it!
(Where do we get the Index? From Sperling’s Best Places!)

Salary in city 1 X (index city 2/index city 1) = equivalent in salary in city 2.

So, for Columbus, Ohio’s $70,000 would equal $138,960 (roughly) in San Francisco, or $120,733 in New York City. Crazy!

What should be noted, is these figures are living in those cities - if you made that salary but lived outside the city limits, you could see a substantial jump in income!

This is particularly relevant to me as I’ve started to weigh job options - the perks weigh into the total worth of the package, and the location determines if it’s worthwhile or not. Lots of options and factors to consider!

A bird in your hand is worth two in the bush - do you understand that metaphor?

Essentially, it’s saying having something in your hands today is worth more than having it down the road - but we aren’t talking about that new car, television, or hot new gadget. We’re talking about cold, hard, cash. It makes sense, right? A dollar in your hands for your expense or savings make more sense than a dollar down the road - where that dollar isn’t giving interest or reducing debt (and the interest you owe).

To show the TVOM we have two useful questions:

1. What will an investment be worth after a period of time? This is the future value.
2. How much must be put away today to provide some dollar amount in the future? This is present value

These calculations are based on basic interest principles: The dollar amount, the rate of interest earned, and the amount of time the money is invested. One formula is the simple interest formula. We break it down as:

• i = prt where
• p = the principal set aside
• r = the rate of interest
• t = the time in years that the funds are left on deposit.

For Example:
If someone invested $1000 (like in an ING CD - contact me for a referral and $25!) for four years with 5.35% interest, they’d receive $214 in interest over the four years. This simple interest formula assumes that every year we withdraw the interest and only keep the $1000 invested. As a savvy investor (or saver!) we don’t really want to do this if we don’t want to. What we want to do is use compound interest. Gain interest on your interest.

If we take our original $1000 and think of the compound interest:
At the end of our first year - our $1000 will grow to $1053.⁵⁰ [$1000 + ($1000 * 0.0535)].
At the end of our second year - our $1053.⁵⁰ will grow to $1109.⁸⁶ [$1053.5 + ($1053.5 * 0.0535)].
At the end of our third year - our $1109.⁸⁶ will grow to $1169.²⁴ [$1109.86 + ($1109.86 * 0.0535)].
At the end of our fourth year - our $1169.²⁴ will grow to $1231.⁷⁹ [$1169.24 + ($1169.24 * 0.0535)].

So compoinding means we gain an extra $17.79 in interest. Doesn’t seem like much, does it? But when we increase the interest (such as, the average return on your investment portfolio, or your 401k) the amount increases more - and the larger the balance, the more interest generated, and the more money you end up with!