Many of us struggle with anything to do with numbers, memories of frustrating school maths lessons can bring on an instant migraine. Knowledge of some simple rules and maths techniques can help you manage your finances and may even save or make you some money.
Rule of 72
This is a quick way of finding out how long it will take for your investment to double in value. Simply divide the number 72 by the projected growth rate of your investment and the result is the number of years it will take for your original investment to double in value . For example a growth rate of 4% per annum will take 18 years to double in value (72 divided by 4).
Rule of 70
This little trick will help if you want to know how long it will take for inflation to halve the value of your money. Simply divide 70 by the expected rate of inflation the result will be the number of years it will take for the value of your money to halve. For example an inflation rate of 3% will halve the value of your money in 23.3 years (70 divided by 3)
Rule of 10
A study by Lincoln Financial Group carried out in 2010 suggests that simply multiplying your annual income by 10 will give you a good estimate of the retirement fund you will need to maintain your current lifestyle on retiring at 65.
Rule of 100
When deciding what approximate percentage of your investment portfolio you should have invested in the stock market then subtract your age from 100. This would mean that a 60 year old should only have 40% invested in the stock market.
Rule of 6
The numbers of months worth of living expenses that you should hold as an emergency fund. This sum should be invested in an easy access account to protect against life's unexpected expenses and financial setbacks.
80/20 Principle
Also known as Pareto's Principle, this is a rule of thumb that states that 80% of outcomes can be attributed to 20% of your effort. Among other things this principle be applied to your investment results where 80% of your returns will normally come from 20% of your investment portfolio.
Law of large numbers
In investment terms this means that the more a company grows the ability to sustain that growth diminishes. When a company is in its infancy it may often produce outstanding levels of annual growth, in percentage terms. However, continuing this high percentage growth becomes increasingly harder as time goes by and the company gets bigger and bigger. This in part explains the potential for impressive returns from investing in smaller companies.
Fibonacci numbers
Any number in the Fibonacci sequence has the property of being the sum of the previous two numbers in the sequence. As such the sequence starts 1, 1, 2, 3, 5, 8, 13 and so on. What's so magical about the sequence is that it can be found repeatedly throughout nature from the branching of trees to the formation of snowflakes. But the magical sequence can even be shown to be present in investor behaviour and stock market movements. The size of market rallies and falls often move in a Fibonacci based pattern. Unsurprisingly many professional investors use Fibonacci sequences to inform their investment decisions.
