The Rule of 72

Over the weekend, I read another great book, The Four Pillars of Investing by William Bernstein. I am not going to give a review this time around, but I am going to discuss on one of the concepts mentioned in the book: The Rule of 72. Honestly, it was the first time I knew it and I thought I would like to share it here in my blog.

According to Wikipedia, it is a method for estimating an investment's doubling time. The rule number (e.g., 72) is divided by the interest percentage per period to obtain the approximate number of periods (usually years) required for doubling. Although scientific calculators and spreadsheet programs have functions to find the accurate doubling time, the rules are useful for mental calculations and when only a basic calculator is available.

For example, if you want to know how long it will take to double your money at eight percent interest, divide 8 into 72 and get 9 years. Below is a table to shows how accurate the rule is.

As you can see from the above, the rule is remarkably accurate. So long the interest rate is less than about twenty percent, it is rather reliable formula. At higher rates the error starts to become significant.

You can also run it backwards such that if you want to double your money in six years, just divide 6 into 72 to find that it will require an interest rate of about 12 percent.

Watch this video from Investopedia to understand more about The Rule 72.

Ask "Frugal Filter" Questions Before Buying Things

"If You Buy Things You Do Not Need, You May Soon Have To Sell Things You Need"

Well, this article is not preaching you to be frugal, but to share my "system" wherever I want to buy something. Just recently I started asking myself these questions before buying stuffs, and the effect is actually quite amazing. I am now can decide well if I really need to buy or not. Practice and let me know what you think.

#1. Do I really need this?
#2. Do I have something else of the similar function?
#3. If I really need this, can I get somewhere cheaper (or free!)?
#4. If I cannot get it cheaper or free, how can I get the price down?


These are the questions I would ask myself before deciding to buy something. Here are some examples.

Thinking of buying an Android Tablet.
#1. Do I really need this? Nope! This is a WANT, not a NEED
#2. Do I have something else of the similar function? Yes, my laptop and Nexus 4 are more than sufficient.
Decision - Do not buy

Looking at Digital weighing machine
#1. Do I really need this? Yes! I am too fat.
#2. Do I have something else of the similar function? Nope, my previous weigh is not functional
#3. If I really need this, can I get somewhere cheaper (or free!)? My housemate use to have it and I can use it for free, but not anymore. I think I do not need digital one, the normal weighing scale will do (cheaper).
Decision - Buy cheaper weighing scale

Malcom Gladwell's bestseller book Outliers
#1. Do I really need this? Yup, a lot of friends recommends this book
#2. Do I have something else of the similar function? Not really
#3. If I really need this, can I get somewhere cheaper (or free!)? Yes! I can read it free at library
Decision - Do not buy, instead read it at library and making own notes

Build Your Capital for Stock Trading

I love system. Whatever I do, I want to see it happening in a systematic way. When you have a system, a good system, what you need to do is to strictly follow it. I made my own trading system. Before buying stocks, it has to go through a series of requirement before I am allowed to buy a stock.

I would like to introduce a money system on how you can build you capital for your stock trading.

If you have read my post of position sizing, it is clear that you need a rather big capital (C) in order to stay alive in the market. As you limit your risk (R), you can only be allowed to trade limited amount of shares (again, it is a position sizing system). So how can you build your capital?

Here is my money system.

#1. I strictly believe you should spend your earning AFTER saving! I mean when you get your salary every month, quickly distribute it (automatically) to a series of saving buckets. Do this religiously. When I started working, I have 4 criteria of savings: short term savings (to be used within one year - vacations), long term investment (retirement, kids educations, practically anything I need to spend my money more than five years from now), emergency fund (you wont know when you are out of job, or when your loved ones fall sick), and investment savings (this is for your stock trading and any investment-related).

My shares: 5% - short term, 5% - long term, 5% emergency and 10% investment. And do not get surprised, I have different bank accounts for each of them.

#2. Short term savings will be used in near future, so I don't really monitor it. However, for the other three, I create an excel sheet to monitor it monthly. If my "ideal" amount doesn't match my real savings, I will do re-balancing, QUICKLY.

#3. If you do it religiously, your investment savings will increase in no time! (Okay, it took me 6 months to be able to buy 1 lot of stocks).

So ask yourself, do you have a system for your savings? If the answer is no, make one now and share with me :)

Plan Your Retirement

In my full business plan for stock trading, you need to start with MISSION of your trading activities. You can have any mission you like, from getting passive income or just to get new challenges. It is totally up to you. However, a more sensible mission for every trader to invest and trade in stocks is to have extra income for retirement.

So, how do you plan your retirement? Start with this online calculator. It is easy to use!

6 Tips from Warren Buffet on Wealth Management

Who wouldn't know Warren Buffet, American businessman and investor who is also the CEO of Berkshire Hathway.

Known for his investing philosophy, many things can be learnt from Warren Buffet investment strategy and the way Mr Buffet manages his wealth. Below are money management advise from Warrent Buffet himself that I always remember whenever I am investing. So, like me, you can apply these 6 quotes on wealth management and apply to your daily investing experience.

#1 "Do not depend on a single income. Invest and create a second, third source of income"

I live by this quote on money management everyday. And you should too. While you are young (if you are!), start investing (or start with saving) now. 

There are many ways you can invest. I personally start with stock investing (of course, you have to learn the proper way on how to buy stocks). If you have extra cash, buy a house or property. Two years ago, my wife and I  bought a small apartment near our town, and it now sits in very nicely as the price have shots up and we are just waiting for acceptable valuation before selling it. I am also investing in mutual funds monthly for longer term plans. Other than that, you can always start your own business (be entrepreneur!). Gold investing may be an option too.

#2 "If you buy things you do not need, you may soon have to sell things you need"

Well, with limited assets (I mean money) coupled with unlimited "wants", life is always tough, isn't it? Well, manage you finance properly and start separate the "needs" and "wants", and be disciplined about it. This quote is one of the best of Warren Buffet saving tips.

#3 "Do not save what is left after spending, instead spend after you save/invest"

This is another favorite quote from Mr buffet I live by everyday (or rather every month after my payroll). I used to tell my wife, "Look, what I have by the end of this month is xxx because we spent xxx on this, this and that." It struck me hard that I have been all wrong. I should, instead, keep aside for savings/investment FIRST, then the rest are for my guilt-free spending. Now, I will always tell my wife,"I have allocated this, this, this and that for our savings/investments, this is what left and we can spend it, guilt-free!"

To give you better illustration, every time I got my salary banked in, I quickly get down to allocate some of my money for savings/investment (later you learn you can automate this)

• 5% - DREAMS - for short term savings (for holiday at the end of the year)
• 5% - RETIREMENT - for long term savings (will only use the fund one year or more later)
• 5% - EMERGENCY FUND (just in case my boss starts to dislike me and I am out of job!)
• 10% - INVESTMENT (added to my broker account, mutual funds top-up, etc)

This are EXACTLY what percentage I use every month. This is minimum! If I have more to save/invest, usually it will go to item #4 above
(I invest more often now, more capital the merrier!)

#4 "Never test the depth of the river with both you feet"

To start investing (mutual fund, buy a stock, gold, est), start small! Start with 10% of you income (see above, I still use 10%) and if are more confident and your profit from investing is better, you can improve the percentage.

#5 "Do not put all eggs in one basket"

Diversification. Make your investment portfolio vary. Also, match you portfolio with your risk level.

#6 "Honesty is expensive, do not expect it from cheap people"

Just remember, people you meet are not all honest, and frankly not all people have the intention to be honest. Good adviser is hard to get, especially when it comes to wealth and money. So be careful in getting advise from people.