4 incredibly useful calculations you can do in your head
Posted
Mar 19 2008, 08:59 AM
by
Karen Datko
This post comes from partner blog The Dough Roller.
A mind is a terrible thing to waste. So let's not waste ours today. Here are four useful financial calculations that you can perform in your head:
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 until 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 five days a week costs about $1,040 a year, or $10,040 in your retirement account 30 years later.
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 and Social Security and Medicare taxes, all of which would make the multiplier even higher.
Does my fund manager's performance justify his fees? Multiple the fund's expense ratio by 10. The result is the percentage by which the fund needs to outperform a low-cost index fund to justify the fee. Think about that: A fund charging 1% must outperform an index fund by 10% to keep pace with an index fund. With the exception of Warren Buffett, nobody has done that for long. Bill Miller of Legg Mason Value Trust beat the S&P500 for about 10 years, but no longer.
What am I worth by the hour? Simply divide your annual salary in half, drop the last zero, and add a decimal two places from the right. If you make $80,000 a year, your hourly pay is about $40 an hour.
Source: These calculations came from January's edition of Money magazine. In years past I never cared for Money (the magazine). I was tired of reading articles with headlines like "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 it.
Other articles of interest at The Dough Roller:
"0% balance-transfer credit cards: The 10 commandments of responsible borrowing"
"Looking to attend college for free? Try Harvard"
"The 1% solution to real estate investing"
