I’m not necessarily at that point in my life. I have lot’s of tax advantaged investing to do. That being the case, I don’t spend much time researching the best brokerages. But I do see the value in it. And I’m hoping to present some of the best online brokers to you soon. TradeKing will definitely be a part of that list.

Earn the $50 Bonus

To get the $50 bonus, here are the steps you’ll need to make:

1. Open a New TradeKing Account (using the link below) by October 31st, 2009.
2. Fund the account with $2,500 within 30 days of opening.
3. Make a trade within 180 days of the account opening.
4. Get paid $50.

More About TradeKing

• For four years running (2006 – 2009), SmartMoney (the Wall Street Journal Magazine) rated TradeKing one of the top brokers in its annual Broker Survey of US brokers.
• TradeKing was awarded the highest ranking of 4 stars in Barron’s 12th Annual Survey of Best Browser-Based Online Brokers. The survey ranked TradeKing second (out of 15 Web-based brokers) for both “Usability” and “Cost”.

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My wife, a teacher, left the classroom back in the Spring of 2008 to go back to school (a different classroom) and to be a full-time Mom. She’s enjoying her time away from teaching, as well as being a Mom. But neither have left her much time to address her old retirement accounts with the school district. For a long time we just weren’t sure what we wanted to do with the funds. Here’s a breakdown of the different funds she had:

• Teacher Retirement System Account
• 403(b) Retirement Plan
• Roth IRA

Our state offers teachers a nice pension plan, the teacher’s retirement system. She really has no choice with this plan. She was forced to contribute and unable to make any investment decisions. The way I understand it, she invested in that system in lieu of social security. So we tend to treat it like social security, and use a “don’t count on it” approach.

Therefore, as you see above, she also had invested in a 403(b), as well as a Roth IRA. The school district offered a very generous match with the 403(b). I assume this is to encourage folks not to rely on the pension alone. The 403b funds, along with the Roth IRA were being managed by Primerica. As an aside, that’s something I wasn’t too happy to discover when I met my wife. But, to their credit, they had her getting the district 403(b) match and diversifying tax-wise with the Roth.

Not to turn this into a bashing session, but Primerica’s fees are just too high compared with other investment brokers. And their sales tactics are questionable. My wife said that the advisor was more interested in getting her friends’ and families’ names and phone numbers than they were in actually providing financial guidance. Regardless, they had her in a good mix of accounts and diversified in various investments.

Back to my wife’s rollover. She’s planning on returning to the school district at some point. But we just don’t know for sure when that will be. Nor do we know if she’d stay for very long (we might have another child, she may want to just stay home full-time, etc.). So, moving the funds to another place seemed like a nice idea. We just didn’t know where.

Then, in the Spring of this year, my wife and I opened up Roth IRAs with Vanguard. This was part of our goal to max out our Roth IRA contributions. Now that we had the Vanguard account ready and waiting, we decided to make the move. I called up Vanguard and requested the forms to rollover the 403(b) to a Traditional IRA with Vanguard and to transfer the Roth IRA funds to her new Roth IRA with Vanguard (I’ll discuss the differences between a transfer and a rollover in a later post). The forms were easy to complete and we should see the funds being moved within a few weeks.

How to Rollover Your 403(b)

Assuming you’re in Mrs. PT’s situation, here are the steps to rolling over your 403(b):

1. Be Sure to Request a Direct Rollover - A direct rollover is when the funds go directly from your 403(b) account to the new IRA account. The money is never in your possession. So don’t go asking your old employer to send you the funds, so that you can do the rollover yourself. They’ll mail you a check, less 20% taxes. This forces you to try and comply with the IRS 60-day rule and scramble to get the funds reinvested in an IRA, using new funds to cover the 20% hit. They give you the 20% back in a credit if you do this, but the whole thing is just a hassle. Avoid it by insisting on a direct rollover. See more under the IRS rules for a tax-free 403(b) rollover.
2. Know What Your Old Plan Requires - It’s a good idea to call up your old employer or old fund manager and learn the rules from their end for having the funds pulled. Also, make sure you’re aware of any fees or forms you might have to send them to give permission for the rollover.
3. Open a New IRA- Your funds need a home. Determining exactly where that is, is up to you. There are many places to open up a traditional IRA. You can go through your bank, or an investment firm like Vanguard, Schwab, or Sharebuilder.
4. Complete the New IRA Rollover Forms – Step 3 and 4 may be one in the same for your investment firms, but once you have your new account picked out, find their process for opening up a Rollover IRA. Be sure to have your statement and old account’s transfer info available to complete the forms. Once it gets rolling, the process may take a few weeks, but it’ll likely be worth it. Here’s why:

Reasons to Rollover Your 403(b)

While there might be a few reasons not to roll over your 403(b), for most people it’s a postive thing. Here are a few of the good reasons to do it:

1. Consolidation of Your Accounts – We’re changing employers more than ever these days. After some time, your accounts can become spread out across different accounts. This can make it hard to properly manage your asset allocation, and generally, just a hassle. Rolling all your old 403(b) accounts to one traditional IRA makes sense for most people.
2. Opportunity for Lower Fees – In most cases the mutual fund expenses associated with 403(b) accounts are going to be higher than what you can find on the open market through a traditional IRA.
3. Typically More Investment Choices- Most 403(b) plans allow you to contribute to a pre-selected list of funds. When you roll your funds to a traditional IRA (through a large investment firm), you’ll typically have the option to invest in
4. It’s Easy – Once you open up your new traditional IRA account with the new firm, they will be glad to do all the work for you. They do rollovers everyday and can typically take the hassle out of it for you. They’re getting your funds, let them do the work.
5. It’s Tax Free – Last but not least, doing a direct rollover should have no tax consequences. You saved your hard-earned money, tax-free, for years in your 403(b). The last thing you want to do is retroactively pay the taxes on those funds. The rollover will prevent you from having to do that. Thus, your original goal for the funds (tax-advantaged retirement savings) remains intact. If you’re not interested in keeping the same tax strategy, see Rolling to a Roth IRA.

If you’ve completed a 403(b) rollover, I’d love to hear about it. Share your experience in the comment section below.

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What is a Roth IRA?

Senator William Roth of Delaware would be proud. We’re still loving his Roth IRA. The investments inside the account may have taken a hit, but the idea behind the account itself is still viewed as one of the best retirement investment vehicles around.

The Roth IRA was first established by the Taxpayer Relief Act of 1997 (of which Senator Roth was a key player).

The Roth IRA is an Individual Retirement Account that allows you to invest in securities (usually stocks and funds) and it works in contrast to a traditional IRA, from a tax structure perspective. You invest in a Roth IRA using dollars that have already been taxed. And qualifying distributions are made tax-free. Pay tax now, don’t pay it later.

Advantages of a Roth IRA

There are many advantages to investing in a Roth IRA:

• Distributions, if qualified, can be withdrawn tax free upon retirement.
• You are free to invest in many different types of investments. For instance, you typically have more choices than in your 401k.
• Your direct contributions can be withdrawn tax-free at any time. Some people like that their money is not locked into a Roth IRA.
• You are never required to withdraw from your Roth IRA. Not even in retirement.

There are more advantages, but those are the biggies.

Disadvantages of a Roth IRA

Depending on how you view it, there are a few downsides to the Roth IRA:

• Contributions to a Roth IRA are not tax-deductible.
• Your income may prevent you from participating in the Roth IRA.
• They may change the rules down the road. It’s no secret that our Government is only getting more expensive to run. What if they tap into Roth IRA earnings in the future?

Based on those negatives, do you think the Roth IRA is for you?

Roth IRA Contribution Rules

You are allowed to contribute $5,000 per year to the Roth IRA. If you are age 50 and up, that number rises to $6,000. You can make these contributions up until you file your taxes. Therefore, for 2009, you’ve got until April 15, 2010 to contribute the $5,000 to your Roth IRA.

Income Rules for the Roth IRA

Like I said above, the rules require you to make below a certain income to be able to participate (gotta love progressive tax rates). The income limits are:

• Filing Single: Up to $105,000 (full contribution); $105,000-$120,000 (to be eligible for a partial contribution)
• Filing Jointly: Up to $166,000 (full contribution); $166,000-$176,000 (to be eligible for a partial contribution)

Do you think it’s a good idea to have income limits on Roth IRA contributions?

You Should Contribute to a Roth IRA

Overall, the Roth IRA is an excellent tool to help you achieve a comfortable retirement. It allows you flexibility with your investment choices and it diversifies your tax burden. Used in combination with your 401k or Traditional IRA, it becomes a powerful piece of your overall retirement plan. Get started – Open a Roth IRA now.

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The way I see it, there are two types of investing you can do:

1. Tax-Advantaged – This is where you should focus your attention. There’s more than enough options in this area to have you set for retirement and have your kid’s college paid for, all while reducing your taxes. Keep things simple and focus on investing here.
2. Taxable – This is the area of investing that should take a back seat for most people. Only go here if you’ve exhausted all options above. If you do invest in this area, please don’t use money that could be securing your retirement or your kid’s college.

Again, that’s just my take on things. I’m sure there are people who could argue against it. To me it’s just the simple way to approach things. Here’s more…

Tax-Advantaged Investing Specifics

Whether they know it or not, most people are already doing tax-advantaged investing through their 401k. This is great! However, even more tax-advantaged investing can be done through a Roth IRA (which uses after-tax dollars, and earnings are tax free if withdrawn after 59 and 1/2).

This is the investing sequence most should use:

1. 401k to Get the Employer Match
2. Roth IRA to the Max
3. Back to the 401k to the Max

See the 2009 Retirement Contribution Limits to find out how to get to the max.

This approach will help you avoid taxes now and in the future. The government, via the IRS, is trying to encourage you to save for your retirement so you won’t simply rely on Social Security. That’s why we have these types of accounts. And that’s why most of these accounts come with stipulations about leaving the money where it is, for it’s intended purpose.

A Roth IRA can be opened at a bank or at an investment firm. I recommend Vanguard. They don’t have minimums on their accounts and their funds are some of the cheapest in terms of fees. If you don’t have one of these, please go open one today. Just do it and get started. It’s really simple.

There’s even more tax-advantaged investing you can do. I won’t get into it here, but I’ll just refer you to this article on 529 Plans and other tax-advantaged education savings accounts.

Taxable Investing Specifics

Taxable investing is taking your after-tax dollars and investing it without a tax-advantaged account. Simple, right? The key thing to remember here is to only invest money here after you’ve exhausted your options in the tax-advantaged areas. These investments will be taxed before you put the money in and the earnings on the investments will be taxed.

Taxable accounts can be opened up at the same places as tax-advantaged accounts, at banks and investment firms. But the best places are the one’s who’ll let you trade cheaply, since you’ll theoretically be doing that more often (because of no limitations by the IRS). These are places like eTrade, Scott Trade, Zecco, Sharebuilder, etc.

More Information

There’s obviously more to investing: what to invest in, proper asset allocation, etc. But the above should hopefully give you an initial framework when trying to decide which direction to go with your investing. Maybe next week I’ll tackle the subject of different funds and asset allocation.

So what’s your take? Is there ever a reason to go with a taxable account first?

photo by thelastminute

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2. Opening a Roth IRA for the First Time
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After looking back at my own savings goals for 2009, I’m feeling pretty good about things. Still, I need a reminder to stay focused on the end goals. Here’s a list of the 2009 IRS retirement plan contributions limits…

2009 Retirement Contribution Limits

Traditional and Roth IRA – $5,000

401K, 403b, 457 Plan – $16,500

Simple IRA – $11,500

SEP IRA – $49,000

Defined Contribution Plan – $49,000

Keep in mind, some of these limits have “catch-up” type rules which allow folks over the age of 50 to contribute more. Also, remember that some of these limits are capped by income thresholds. Check out the IRS website for more information.

Still Time to Go for the Max

Okay, let’s say you haven’t yet contributed to a retirement plan this year. No worries. You’ve got a while to contribute, so get to it.

For your 401k, you’ve got till December 31, 2009. That leaves 6 months, or 12 paychecks if you’re paid bi-weekly. If your goal is to max out, you’ll need to put $1,375 per paycheck towards your 401k. That’s a lot, but I know there are some readers who could make this happen.

For a less daunting goal, try maxing out the Roth IRA, an retirement account that uses after-tax dollars, but allows your savings to grow tax free. Your limit is lower ($5,000), and you actually have longer to contribute. With an IRA you’ve got until you file your 2009 tax return in 2010. If you file as soon as you get your W-2’s, then make your end goal January 31, 2010. If you wait until the last minute to file, then maybe set March 31, 2010 as your end date.

Similar to the calculation for the 401k, take the IRS limit, in this case $5,000, and divide it by the number of paychecks you have left. If you’re shooting for January 31, 2010, and you’re paid by-weekly, that’s $358 per paycheck. Not too bad. Most two income families could likely do this.

So what do you think? Can you do it? I’ve found it to be easiest to save when my savings are automatically deducted from my paycheck, before I get to spend it. So, as I always say, head over to your human resource or payroll department today and set it up. But first, read how to open a Roth IRA for the first time.

Retirement savings is important, but there’s a whole lot more to getting your financial house in order. If you’re up for a bigger challenge read my mid-year financial check-up series. Good luck.

© PT Money - Visit PT Money for more articles on saving money, frugality, and debt reduction.

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Related posts:

1. Roth IRA Rules
2. Opening a Roth IRA for the First Time
3. Roth IRA: A 2008 Goal You Still Have 4 Months to Achieve

How Do You Make Investment Decisions?

Making investment decisions can be a scary and overwhelming process. It seems like we are constantly bombarded with information about the market – one moment everyone’s excited, and a few hours later they are all disappointed. How can anyone make sense of this? The single most important thing to remember is that your investment decisions are largely determined by your personal situation. Creating a personal investment policy statement can be a great way to clarify your objectives and organize your financial planning.

Establish Your Investor Experience Level

Your investment policy statement is a document that outlines guidelines for you and your investment advisor. The policy should start by establishing your investment knowledge base. Are you an experienced investor, or are you just starting to learn? A financial advisor who understands this will have a better idea of how to communicate information effectively. Morningstar has a great outline to help you get started.

Know Your Investing Goals

The next step is to define your financial goals: what are your goals, how much will they cost, and when will you need the money? For example, one goal could be to have one million dollars at retirement in twenty years. This exercise will help you identify your long-term financial objectives.

Define Your Desired Asset Allocation

The final part of the document should focus on your asset allocation decision. Based on the discussion on financial goals, you can outline your risk tolerance, and select investments that match your objectives and appetite for risk. Less experienced investors should consult a financial advisor to help them complete this section. If you have done a good job defining your financial goals, a professional and ethical financial advisor will have the right pieces of information to make the proper choices on your behalf.

Other Considerations

In addition to helping your understand your financial picture, an investment policy statement also has some legal advantages. If your financial advisor is given an investment policy statement, they must take it into consideration when choosing your investments. In trying to maximize their commissions, some financial advisors may try to sell you investments that are less than optimal. Giving them a well-crafted investment policy statement can help prevent this unscrupulous practice.

In these uncertain times, we seek clarity and objective guidance more than ever before. An investment policy statement is a great first step towards determining what is right for you.

Editor’s note: While I don’t personally use an investment advisor (my investing is fairly simple right now), I think providing them a guideline to follow is an excellent idea. And even though I don’t have an advisor, it’s still good to have a personal investment policy to help guide your own decisions, regardless of the changing times. My goal over the next week is to create my own policy and try and share it here on the blog. Thanks, Vik!

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My company stock had an unexpected high last week and so we decided to exercise some of the options I had received when I was hired. Company stock isn’t something I want to hold onto any longer than I have to, so it was good to see a bit of it go, and some extra cash for debt repayment coming our way.

On top of all that, I was able to see my Mom this weekend for Mother’s Day, celebrate Mrs PT’s first Mother’s Day, and participate in our baby girl’s dedication at Church. It was truly a special weekend. On to the quickhits…

The QuickHits

Here’s some nice posts from last week’s reading…

NCN, who’s thankfully decided to stay in the blogging business a bit longer just posted a great article at No Credit Needed titled, A 10 Step Outline of Our Financial Plan. I love posts like this that really show you how to map our your financial life. NCN is my hero.

What do you think of this Prepaid Credit Card for Teens discussed at Moolanomy?

Credit Cards Don’t Suck, You Suck! Thanks for the compliment, Free From Broke.

10 Dumb Ways Of Wasting Money, a guest post at Bible Money Matters.

Kacie from Sense to Save is finally Paying of the Car Loan! See how she did it. Awesome!

Think Your Way to Wealth presents, Is Buy and Hold Dead or Just Misunderstood?

Disputing a Charge on Your Credit Card by Stretchy Dollar

122 Ways to Trim Your Budget at Frugal Dad

The Blog Carnivals

Carnival of Debt Reduction: It’s a Marathon, Not a Sprint!

Carnival of Personal Finance: Birthday Edition

Carnival of Pecuniary Delights: Are You Cashing In on Going Green?

Thanks to the generous hosts!

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As an FYI, these screens may change over time, but the process should stay the same. You’ll need to select the type of investment account, enter your personal and banking information, select a fund or funds, and you’re done.

Here’s the Vanguard home page, where you simply need to click on the “open an account” button under the “Invest Now” section. You can see from the front page what Vanguard values most: the simple message of low-cost investing.

Vanguard keeps it pretty simple with their next screen. Here you’ll need to designate whether you want to open a new account (like I did), roll over an existing 401k (very common to have one of these back with an old employer), or transfer investment funds from another account. You’re also asked to register with Vanguard (but you can put this off till the end).

The next screen is almost a repeat of the previous one, except you have a section on the bottom to make a choice between going with Vanguard Mutual Funds, or stocks, bonds, and non-Vanguard funds. Since I’m at the Vanguard site looking for low-cost funds, this choice was a no-brain-er for me. Although, this is a good time to point out that you can invest in just about any type of investment product within your Roth IRA. It doesn’t just have to be mutual funds.

Okay, the next screen is when you begin to enter your personal information. All the basics, including the SSN are required. If you’re married and both you and your spouse are opening an account, make sure you put a different SSN in when you open your spouse’s account.

Up next is the screen where you’ll enter your bank information. This is the account you’ll be withdrawing your investment deposit from. A quick login to my ING DIRECT account enabled me to track down my routing and account numbers.

Alright, now to the fun stuff. To your right you’ll see the default option, the Prime Money Market Fund. If you have yet to do the research regarding which particular fund you’d like to invest in, this money market fund might be the best place to house your initial investment while you learn which particular fund or group of funds you want to invest in.

Keep in mind, most of the funds on the left have a $3,000 minimum deposit. So if you’re not at that level yet, then the money market fund will have to do. Note though, that these funds won’t be FDIC insured. So you might want to put a small amount here just to get started and save up the balance of your $3,000 in an FDIC insured high-yield savings account.

As for the mutual funds on the left, the choice is entirely up to you. This is definitely an area I’m not qualified to comment on. Let me just say that there are plenty of low-cost funds to chose from and there’s something in there to meet your risk tolerance and balance your asset allocation.

The final screenshot I have to show you is the page below where you’ll get to select what tax year you’d like your Roth IRA contribution going towards. This screen will only be active from January 1 to April 15 each year, as that’s the only time you can contribute to either tax year.

After that step is complete you will have made your initial investment. You will simply need to complete the online account opening process. I won’t take you through those last steps because they’re pretty straight-forward. I hope this guide will provide some value to those wanting to open up a Roth IRA with Vanguard. The process is really easy and takes less time than you think.

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2. Roth IRA Rules
3. Roth IRA: A 2008 Goal You Still Have 4 Months to Achieve

In a time when the company 401k match is no longer there for some (like me), it makes sense to be going the extra mile with a Roth IRA.

It feels really good to have finally met this goal (see Roth IRA goal). It’s been a long time coming. Ironically though, it was very quick and easy to do. Here’s the how and why on setting up a Roth IRA:

Stepping Up to the Roth IRA

Up until this point in my life, I’ve done my retirement savings using two types of accounts: my company 401k and a traditional IRA. The traditional IRA was used as my main retirement account prior to participation in a 401k (you usually can’t do both at the same time).

Once I got into the 401k scene, I made sure I got the match. And now, for the first time, I’m transitioning my extra retirement contributions (beyond my 401k contributions) to a Roth IRA.

Keep in mind though that it’s not a requirement to take it in these steps. You can open up a Roth IRA right now and start saving money for retirement!

Why Open a Roth IRA?

Three reasons I’m opening up a Roth IRA:

1. I’d like to contribute more to my retirement annually than my 401k limits will allow. Like I said above, I’m maxed out on my 2008 tax-deductible 401k contributions. The next logical option is the Roth IRA.
2. I want more investment options than my 401k (currently through Fidelity) will allow. The funds available in my company 401k mix are good, but maybe a little high in cost. I want to buy into low-cost funds.
3. I want my retirement funds to be diversified from a tax perspective. The 401k is taxed on distribution (when you retire and start taking out money) and the Roth IRA is the opposite. It uses after-tax funds going in, but allows you to take distributions tax-free. Having both allows you to hedge your bets on your future tax rate.

How Much to Contribute and What to Invest In?

The answer to the first question is, “as much as possible” and up to the maximum allowable contribution of $5,000 (2008 and 2009). We’ve started our accounts with $3,000 each and plan to add the additional $2,000 over the next 10 days (we’re moving money around, but want to have it invested prior to the date we file our taxes so we can attribute it to 2008 limits).

The answer to the second question is really a topic for another post. I can tell you though that we’ve invested in low-cost index funds. Vanguard has several to chose from. Unsure about the market? You can actually place your Roth IRA contributions in stable money market funds, amongst many other options.

Where to Open the Roth IRA

I chose Vanguard as my investment manager. However, you can open a Roth IRA with several different types of financial companies: your bank, major investment firms, or discount brokers. All you need is your basic personal information and your bank account and routing numbers to make the initial transfer.

Vanguard’s mission is to “help clients reach their financial goals by being the world’s highest-value provider of investment products and services”. That “highest-value” translates into lowest-cost when it comes to index funds. Vanguard is highly regarded amongst most personal finance experts, bloggers, and CFPs as the best place to invest in an IRA or taxable account. When I spoke with Kiplinger and NAPFA back in January, they suggested Vanguard.

My Plan for 2009 and Beyond

This definitely isn’t a one-time deal. What particular fund I invest in may change, but I plan on making the allowable maximum contribution to my Roth IRA each year until retirement. For 2009, that will be another $5,000. At some point I’ll probably consider setting up an automatic contribution to the account.

Final Note: Keep in mind there are income limits and contribution limits to tax advantaged retirement accounts like the Roth IRA. Definitely do your own research. A good place to start is the IRS guide to IRAs.

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2. Vanguard Roth IRA Account Opening Process
3. Roth IRA: A 2008 Goal You Still Have 4 Months to Achieve

The Rule of 72 is often used by finance people to show how long it will take an investment to double. It’s a quick and easy way to see how a few percentage points will affect the growth of your investment over time. When you are considering two investments a half of a percentage point might not seem like a big difference. But when you see how it affects the doubling time you might change your mind. A savings account that earns 2% will take 34.69 years to double, while an account earning 2.5% will only take 27.75 years. That’s a 7 year difference.

With the savings rates being driven down by the economy it makes a huge difference to us savers. A few years ago I was able to get a CD earning 5%. Now I’m lucky to see 3%. While 2% might not seem like a big deal, it will take me a full 10 years longer to double my money.

What is the Rule of 72?

The Rule of 72 is a quick and easy way to see how long it will take your money to double at a given interest rate. You take 72 and divide it by the interest rate. So for example, if you are earning 2% it will take 36 years for your money to double (72/2). The amount of money that is doing the doubling doesn’t matter. It will take $1 to turn to $2 the same amount of time it will take $100 to turn to $200 if both sets are earning the same interest rate.

What’s Good About the Rule of 72?

What’s great about the Rule of 72 is that you don’t need a scientific calculator to determine a rough estimate of when your money will double. To calculate the actual formula for doubling time you need a calculator that can do logarithms. Since most people don’t carry around such a calculator, it’s nice to have a simple, easy to use equation.

But the Rule of 72 Doesn’t Work!

First off we have the issue of compounding frequency. How often the interest is added to the balance will affect how quickly the original amount will double. When considering interest rates between 2% and 20% the Rule of 72 only provides an accurate estimate when interest is compounding annually or semi-annually and at very limited interest rates. I’ve determined a result within .03 years (about 11 days) of the actual doubling time to be considered accurate.
The rule of 72 is accurate in the following situations:

• Compounded annually with interest rates between about 7% and 9%.
• Compounded semi-annually with rates between about 13% and 20%.

Let’s take our example above of earning 2%, which sadly is about what you are probably earning on your savings account right now. The Rule of 72 says it will take your balance 36 years to double. Your savings account probably compounds interest monthly, so at 2% it would actually take 34.69 years. Which is about a year and 3 months quicker than the Rule of 72 says it would take.

So what works better? The Rule of 70!

The Rule of 70 provides more accurate doubling times for more interest rates between 2% and 20% and for more compounding frequencies than the Rule of 72. Simply divide 70 by the interest rate rather than 72.
The Rule of 70 is accurate in the following situations:

• Compounding annually with rates of 2% and 2.25%.
• Compounding semi-annually with rates between 2.5% and 5.5%.
• Compounding quarterly with rates between 5.75% and 11.75%.
• Compounding monthly with rates between 11.25% and 20%.

Download: Rule of 72 vs. 70 (whole percentages)

As you can see, the Rule of 70 works much more often than the Rule of 72. And even when the Rule of 70 is providing it’s least accurate results it is still often times more accurate than the Rule of 72. For example, lets look back at our savings account earning 2%. The Rule of 70 says that our money should double in 35 years. We’ve already determined that the actual doubling time is 34.69. So the rule of 70 is only about 3 months off, while the Rule of 72 was a full year and 3 months off. Clearly, the Rule of 70 is a more useful tool for estimating doubling time than the Rule of 72 ever was. For a more detailed analysis, download the Rule of 72 vs. 70 (quarter percentages)

So what’s your opinion? Which is better? The Rule of 72 or 70?

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