The Rule of 72 tells you how many years you need to double your savings. To take advantage and get the most out of your savings, you’ll want to get in the habit of keeping 10% of your income as savings. For many people, this is difficult because we’re already living outside our means. If you can’t reasonably save 10% of your income, take a good, hard look at where your money goes for a period of three months by writing down what you spend or pay to the penny. Eliminate unnecessary spending and bad financial habits so that you are able to save 10% of your income in a savings account.

The Rule of 72 then says to divide 72 by the interest rate your savings receives to find the number of years needed to double your money. A low-interest savings account of 2% will take about 35 years to double (assuming the interest is compounded annually). Savings earning an 8% return will double at about 9 years.

When looking at your debts, you can use the “20-10” rule. Limit your total debt (excluding your mortgage) to less than 20% of your net annual income, and you’ll be able to use 10% or less of your net monthly income toward paying back debts.

If you earn $54,000 a year, you want to keep your debt under $10,800. ($54,000 x 20% = $10,800).

Your total monthly debt repayments (again, not counting your mortgage) should not be more than 10% of your net monthly pay.

If you earn $54,000 a year, you earn $4,500 a month. Your monthly debt repayments should be $450 or less. ($54,000 / 12 = $4,500 and $4,500 x 10% = $450).

Learning how to save and borrow money wisely are the basic building blocks for having financial security. Here are some tips to help you get there:

Live Within Your Means

All financial experts will tell you not to spend more than you can afford. Even people who claim they can’t save any money each month because they’re already using every last dime to pay just the basic necessities probably could trim down their expenses somewhat. If you keep a financial journal for three months and religiously record every last purchase and all the income coming in – you will be able to see where there is money being spent that is not necessary.

Create a Budget

Once you have a better understanding of your income and expenses, you can create a budget. Figure out how much is used to pay expenses and debts, and how much will be saved each month, and how much you have for miscellaneous spending and try to follow it as closely as possible.

Plan Ahead for Additional Spending and Costs

There is no point saving money if you can never use it! Plan ahead for events like vacations and unexpected expenses. When you plan in advance, you can keep your costs low by shopping around for the best deals and not just spending money spontaneously.

Tags: 20-10 rule, debt, get out of debt, grow savings, rule of 72, savings

This entry was posted on Tuesday, June 8th, 2010 at 7:58 am and is filed under tips. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

• The Rule of 72, 114, and 144 This is a guest post by Dax Desai. I write at a self-named blog about daytrading, financial planning, and small business issues, and whatever invades my mind at the moment. I was interested in doing a guest post at this...
• Marriage and Money: Financial Game Plan This series was inspired by the recent marriage in our family. I organized some information with my brother in law and new sister in law in mind. If you find these tips to be useful, please share them. Congratulations on...
• Dig Yourself Out of Debt: Spend Less Than You Earn This is part 2 of the “Dig Yourself Out of Debt” Series, published every Thursday. Surfing old posts? You can catch up on Part 1 by clicking here, or view every post in this series by clicking here. The title...
• Money Guest Post - Learning As I Go. (FYI - Since I will be out of town for a few days and my internet connection will be sporadic at best, I asked No Credit Needed to write up a guest post. Thanks NCN!) I want to thank "My...
• How Far Into Debt Should You Go? While most of us get the general principle that we need to go into debt if we want to build up our credit, it’s tough to know exactly how far you should go. When you’re first starting out, it’s all...