Friday, September 09, 2011

Family Lawyer In Houston Offers Basic Economic Principles in Action for Your Family

Whether you are running a Fortune 50 corporation, or just trying to keep your household expenses from exceeding your salary, the same basic financial concepts which I use in my personal life can apply for you. These are fundamental building blocks for wise financial decisions.

Quick Interest Calculations: The Rule of 72
Want to double your money? The Rule of 72 can tell you how long it will take, based on the specific interest rate you're looking at. Just divide 72 by the interest rate. For example, if you are looking at an investment with an interest rate of 6 percent, then 72 divided by 6 gets you an answer of 12 years.

This is a rough estimate, of course, but it is pretty effective.

In fact, you can also turn the equation around to determine the interest rate you are looking at if someone promises to double your money in a set amount of time. Twice as much money in 12 years? Divide 72 by 12 and you get an interest rate of 6 percent. This rule lets you evaluate investment opportunities quickly and decide where to put your money.

Opportunity cost.
What do you need to give up in order to get something you want? It is a question of money, but also time and value: Pursuing an advanced degree may take years--are you willing to put in that amount of time? Will a sports car give you enough enjoyment to offset going into debt for it?

Sunken costs.
This is money you can't get back--a non-refundable airline ticket, for example. Keep sunken costs in perspective. It is easy to start thinking "Well, I have already spent $100, what's another $25?"  You have got to be willing to walk away sometimes.

Time value of money.
According to this principle, a dollar you receive today is worth more than a dollar you will get tomorrow. You will have opportunity to invest that dollar immediately and begin earning more revenue from it (and also avoid losing value because of inflation).

Again, this helps you make calls about your purchases -- and your income. It is the old "a bird in the hand" theory in action for your wallet.