Northridge Tax Professional’s: “Back-of-the-Napkin Financial Principles Even *I* Use”

"The game of life is not so much in holding a good hand as playing a poor hand well." – H. T. Leslie

Meeting with clients this past week (and the week before) has been a blast.

No — really! And yes, I know, I should get out more.

The reason we enjoy doing this (especially this time of year), is that seeing the look on clients’ faces when we identify tweaks and quick moves which carry a significant ROI on their tax dollars … well, it’s worth all of the time we’ve put in to learning this craft.

Sometimes during these meetings, I’m duped into sharing some of the ‘private’ details on how I think about taxes, finances and investing for my OWN family. Yes, I do try to practice what I preach in these Notes to my clients and friends! (And yes, I do have a private life outside of tax forms.)

Enough people have told me that these back-of-the-napkin principles which I share have been helpful, that this morning I’ve been motivated to put some of them down for you in easy-to-digest form!

So, without further ado, Enzo Paredes’s Napkin Financial Strategies…

Enzo Paredes’s
"Real World" Personal Strategy

Economic Principles in Action for Your Family

Whether you’re 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’re 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’s pretty effective.

In fact, you can also turn the equation around to determine the interest rate you’re 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’s 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’s easy to start thinking "Well, I’ve already spent $100, what’s another $25?"  You’ve 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’ll get tomorrow. You’ll 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’s the old "a bird in the hand" theory in action for your wallet.

I hope these help!

Northridge Tax Professional’s: “Back-of-the-Napkin Financial Principles Even *I* Use”