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In their latest episode Damien and Andy talk about a few simple mental arithmetic sums you can do to help you better visualise and contextualise your finances.
I just wanted to briefly outline the points made to bring further awareness to these handy tips as I’d never heard most of them before and thought they were worth sharing…
1. Quick percentage calculations
Some percentages are relatively easy to work out off the top of your head: 20% is just 10% doubled, or 5% is 10% halved.
But investing and interest rates in the real world throw up all number of ‘fun’ variations that become a little more complicated when you don’t have a calculator (or let’s be honest, phone) to hand.
To work out the percentage of a number you can flip the sum upside down to simplify the original calculation, so for example:
20% of 60 ~ 60% of 20
2.2% of 50 ~ 50% of 2.2
67% of 15 ~ 15% of 67
82% of 53 ~ 53% of 82
The last one appears a little trickier than the other three if you’re trying to do it quickly, but round both down (50% of 80 = 40) and you have an easier calculation and rough answer to work with.
A quick way to roughly calculate investment returns, money off offers or cash back rewards.
2. The rule of 72
This simple rule helps you estimate how you long it will take for your money to double when earning (X)% interest.
To do this you divide the interest rate into the number 72.
For example, if you received a 5% return this year on your investments, you do 72 / 5 = 14.4, meaning it’ll take roughly 14.4 years for your investments to double at this average rate.
You can do something similar to work out how long it’ll take to treble, but this time you swap out the number 72 with the number 115.
3. Know your hourly rate
An even simpler one, and again a rough estimation; ‘salt’ and ‘pinch’ and ‘give or take’ come to mind.
To work out your hourly rate you take your net salary (income before tax) and take off the three zeros at the end and divide that number by 2.
For example, if you earn £25,000 a year.
Take off the 2 zeros = £25.
Divide £25 by 2 = £12.50 p/hour.
This is a particularly helpful way of comparing how long you would have to work to purchase something. That’s if you need any more persuading not to buy that 99th pair of shoes you don’t really need.
4. The rule of 13
This is one of Damien’s own rules.
How much of a pension pot would you need to maintain your current lifestyle while in retirement NOT including the state pension?
Take your current salary and times it by 13.
We’ll stick with £25,000 a year times by 13 = £325,000.
Again, this isn’t an exact science and a lot of assumptions are being made (paid off mortgage, no debt etc.) but it gives a rough guide to aim for.
This number also seems a little daunting, especially if you’re at the start of your career, but embrace the power of compound interest and get used to consistent, regular pension contributions and you’ll eventually see your money work its magic.
5. The 19 year sandwich
I’ll let Damien tell you this one himself…
The example used might seem a little extreme but it does highlight the importance of making sure you’re paying off your credit card in full every month.
Never think of the money on your credit card as yours. It’s not; it’s the banks. The clue is in the name: CREDIT.
So to sum up, a lot of assumptions and a little rounding here and there, but some helpful quick-fire tips nonetheless to get you by until you can properly sit down and work these things out.
And finally, I have a few additions to the site coming soon, so stay tuned.