## Posts Tagged ‘rules’

October 31, 2008

I’ve started to realise that applying a little elementary calculation is very important to my frugality practise. Over time, I’ve got in the habit of using some simple rules to decide whether something is a good deal.

Annual Savings

When I look at a saving, if it’s near weekly I multiply by 50 to figure out what I would save over a year. If monthly, by 12. And so on. I always try and think about what something is worth over time. One long black every weekday? \$3.50 x 5 is 18.50, call it \$20 a week; so that’s about \$1000 on coffee a year. Which (are you reading this Morgue?) I would like to find down the back of the sofa. Wouldn’t you?

Interest

Do you know the rule of 72? If a sum of money earns umpty % interest, just divide 72 by that number to find out how many years it will take to double. When I do this in my head I cheat and make it 70, which isn’t quite as accurate but is close enough.

So if you have a 100 bucks at 10%, it will take a bit over 7 years to turn into 200 bucks. I always find that quite encouraging. I think to myself, well, Stephen, if you could save \$500 this year (see previous rule) and invest it at 7%, then it will double in 10 years, so that \$500 will be worth \$1000 before you’re 50.

Hours I would have to work

I have done the maths to figure out my hourly rate after tax and expenses. So I can look at something chunky and say “gosh! I would have to work for a week to pay for that!” and then ask myself whether it’s really worth a week’s work to me.

Notice I said “after tax and expenses.” I reckon that just using your raw hourly rate doesn’t reflect the reality that tax and essential spending reduce the amount available for you to dispose of (“discretionary spending”). I got this idea from the marvellous book Your Money Or Your Life. There are copies in the Wellington Public Library.

Multiply by 25

This is a bit complicated to explain in detail—the idea comes from here—but the guts is, if you make some conservative guess about returns on savings, then multiplying by your yearly spending on something by 25 tells you how much you’d have to save to pay for something out of savings interest without running your savings down.

For example, if you spend \$240 on takeaway pizza a year, because it’s your monthly treat, and you could save \$6000, you could pay for all your pizza needs out of the earnings on that \$6000 and still not run it down.

Help me out

Do you have rough reckoning rules that help you make money decisions quickly? What are they?

Fingerwagging Postscript

When I was at school, and we asked why we had to learn maths, we were told it would be useful in later life. (This is true even for higher maths, actually, but not many people I went to school with became programmers). However, we didn’t get very concrete explanations. I would now say if I were a maths teacher: because if you don’t learn basic arithmetic, and fractions, and percentages, and algebra, people who have learned those things will cheat you blind.

I never really cared about the answer because I liked maths and was good at it. But I do think that if you hated maths, and were not good at it, it would be really worthwhile to get a little remedial tuition now. I can’t imagine how you can make good money decisions without it, and it must be very stressful worrying about whether you’re coming out ahead or not.

One thing I did turn my nose up at was spreadsheets. A few years ago I worked with people who would model every little decision in a spreadsheet, and I used to think that was pretty naff. But now I cannot stop making them, and damned handy they are. If you have a PC (and how else are you reading this?) you can get OpenOffice for free. Learning to drive its spreadsheet component is a valuable investment of your time.