Best Financial Formulas Everyone Should Know

You don't need a PhD in economics to be good with money. A few simple rules of thumb can help you make 90% of your financial decisions correctly.

1. The 50/30/20 Rule

Popularized by Senator Elizabeth Warren, this rule simplifies budgeting:

• 50% Needs: Housing, food, utilities, transportation.
• 30% Wants: Dining out, hobbies, entertainment.
• 20% Savings: Retirement accounts, emergency fund, debt repayment.

2. The Rule of 72

Want to know when your investment will double? Divide 72 by your annual interest rate.
Example: At 8% return, 72 / 8 = 9 years to double.

3. Debt-to-Income Ratio (DTI)

Banks use this to decide if they will lend to you. You should use it to check your financial health.
Formula: (Total Monthly Debt Payments / Gross Monthly Income) x 100
Goal: Keep this below 36%.

4. The 4% Rule

Used for retirement planning. It states you can withdraw 4% of your portfolio in the first year of retirement (adjusted for inflation thereafter) and likely not run out of money for 30 years.

5. Net Worth

The ultimate scorecard.
Formula: Assets (Cash, Home, Investments) - Liabilities (Loans, Credit Card Debt)
Track this once a quarter to see if you are actually getting richer or just spending more.

Conclusion

Money is a game of math. If you know the rules (formulas), you are much more likely to win. Pick one of these formulas to apply to your finances today.