Multiply-by-25 Rule

Multiply-by-25 Rule (How to Start Saving Money)

The most frequent thought question is “How do I get started saving money?” I’ve read that the best way to get aspiring savers started is with the wonderfully simply but wonderfully powerful Multiply-by-25 Rule. There is something magical about how this rule helps people quickly learn how to start saving money.

How much you need to save to finance all your costs of living and enjoy a full retirement from the work force. Let’s say that you spend 720 Rs per year on magazine subscriptions. The Multiply-by-25 Rule tells you that it takes a savings fund of 18000 Rs to finance that spending category for life. 18000 Rs kicks off enough earnings each year so that you never again need worry about working to pay for magazine subscriptions. That’s on an inflation-adjusted basis. That is, the magazines are paid for and the real value of the Rs 18000 does not diminish at all over time.

The Multiply-by-25 Rule assumes that you will be able to invest the money saved in an investment that will provide a 4 percent annual real return. If you prefer to go with an assumption that your investments will only earn a 3 percent annual real return, you need to employ instead a Multiply-by-33 Rule. If you think that it is reasonable to assume a 5 percent annual real return, you can use a Multiply-by-20 Rule (use interpolation to find other values).

Sometimes it’s safe to take 2 year expenditure and multiply it by 25…


Courtesy: http://www.passionsaving.com/how-to-start-saving-money.html