The most important formulas in Personal Finance

Most people do not need a finance degree to manage their money well. They need nine formulas — and the discipline to apply them.

Do you need maths skills in personal finance?

Financial success is roughly 80% mindset and 20% technical skill. But that 20% is non-negotiable — a conditio sine qua non, as the Romans put it. The good news is that the technical part requires no advanced mathematics. Warren Buffett said it clearly:

"Investors should be sceptical of history-based models. Constructed by a nerdy-sounding priesthood using esoteric terms such as beta, gamma, sigma and the like, these models tend to look impressive. Too often, though, investors forget to examine the assumptions behind the symbols. Beware of geeks bearing formulas." — Warren Buffett

The risk is real: complex models seduce with their precision while hiding weak assumptions. Garbage in, garbage out — no matter how sophisticated the equation. Most personal finance decisions can be handled with back-of-the-envelope calculations. The nine formulas below cover the full journey: from understanding where your money goes, to measuring how much wealth you are actually building.

1. Net Income = Total Revenues – Total Costs

This is the starting point. It tells you whether you are making a profit on your life — whether you are spending less than you earn. Everything else in personal finance depends on it being positive.

Example: $100,000 (revenues) – $60,000 (costs) = $40,000 net income. That surplus — call it profit, saving, or bottom line — is what you have available to invest. No surplus, no financial progress. It really is that simple.

The single most important principle in personal finance: spend less than you earn and invest the difference.

2. Burn Rate = (Total Costs / Total Revenues) %

Your burn rate tells you what percentage of your income you are spending. It is an instant health check. A burn rate of 90% means you are keeping 10 cents of every dollar — not much to work with. Bring that number down and you immediately have more resources to save and invest.

Example: $60,000 ÷ $100,000 = 60% burn rate. The questions to ask when reviewing this number: Am I spending consciously? Can I distinguish needs from wants? Am I creeping into lifestyle inflation? Am I carrying unnecessary debt?

Increasing your income does not automatically lower your burn rate. That is a management choice, not an income event.

3. The 50 – 30 – 20 Rule

Once you know your net income (Formula 1) and burn rate (Formula 2), you need a framework for allocating what you earn. The 50-30-20 rule is the simplest one available:

The formula is a reference, not a straitjacket. Your saving rate can — and should — increase over time as you optimise your costs and grow your income. Some people push it to 30% or even 50%. The point is to treat savings as a non-negotiable line item, not whatever is left at the end of the month.

Pay yourself first. Set aside your savings before you spend anything else.

4. The Rule of 72

How long does it take to double your money? The Rule of 72 gives you a quick answer without a calculator. Divide 72 by your expected annual return and you get the approximate number of years.

The Rule of 72 is useful for comparing investment options quickly and for understanding the real cost of inflation — if inflation runs at 4%, your purchasing power halves in roughly 18 years. The same maths that grows wealth can also erode it.

5. The Rule of 25 (The 4% Withdrawal Rate)

How much do you need invested to retire? Multiply your estimated annual expenditure by 25. That is your target nest egg — the amount that, invested at a long-run average return of around 5%, allows you to withdraw 4% per year indefinitely.

Example: annual costs of $65,000 require a nest egg of $1,625,000. The formula also works in reverse: when 4% of your invested assets equals your annual expenditure, you can fully retire — without relying on government support.

Note: the 4% rule rests on historical assumptions about portfolio returns and inflation. It is a planning tool, not a guarantee. Sequence-of-returns risk, longevity, and lifestyle inflation all deserve separate consideration.

6. Net Worth = Assets – Liabilities

Your income tells you how much you earn. Your net worth tells you how wealthy you actually are. The two are often very different numbers. A high income with no savings and significant debt produces a low or negative net worth. A modest income with disciplined saving and investing can produce a substantial one.

Assets include everything you own: bank accounts, investments, property, pension funds, business equity. Liabilities include everything you owe: mortgage, credit card debt, student loans, personal loans. The difference is your equity — what you would have left if you settled all debts today.

Track this number monthly or annually. It tells you more about your financial health than any other single metric.

7. Money as Hours of Life

Every dollar you spend represents time you worked to earn it. This reframe shifts purchasing decisions from abstract numbers to concrete life investment. There are two versions of the calculation:

Option A — Formal Hourly Rate

1. Take your annual gross income (e.g. $100,000).
2. Deduct taxes to get net income (e.g. $100,000 – $35,000 = $65,000).
3. Calculate annual hours worked (e.g. 260 days × 8 hours = 2,080 hours).
4. Formal hourly rate = $65,000 ÷ 2,080 = $31.25 per hour.

Option B — Real Hourly Rate

1. Take your annual gross income (e.g. $100,000).
2. Deduct taxes: net income = $65,000.
3. Deduct job-related costs — commuting, work clothing, training (e.g. $10,000). Real net = $55,000.
4. Add unpaid extra hours, commuting time, business travel (e.g. 600 hours). Total = 2,680 hours.
5. Real hourly rate = $55,000 ÷ 2,680 = $20.52 per hour.

The gap between the formal and real rate is usually significant. It changes the conversation about whether a job or business is as financially efficient as it appears.

8. A Purchase as Hours of Life Equivalent (HLE)

Once you know your real hourly rate, you can convert any purchase into the hours of life it cost you. This is one of the most clarifying lenses in personal finance.

Example A: real hourly rate of $25; a new watch at $350. That is 14 hours of your working life. Is the watch worth 14 hours? Perhaps yes. Perhaps not. The formula does not make the decision — it makes the cost visible.

Example B: same hourly rate; a new car at $35,000. That is 1,400 hours of working life — roughly 8.5 months of full-time work. Does the purchase still feel the same way?

This formula does not tell you not to spend. It tells you what you are actually exchanging when you do.

9. The Lifetime Wealth Ratio (LWR)

The Lifetime Wealth Ratio, popularised by personal finance blogger J. Money, answers a question most people never ask: of all the money I have ever earned, how much have I actually kept?

It combines a stock measure (net worth — your accumulated position) with a flow measure (lifetime income — everything that has ever passed through your hands). The result shows your overall efficiency as a wealth builder, regardless of income level.

I find this formula useful because it is honest. High income with poor retention scores low. Moderate income with disciplined saving and investing scores high. It rewards the right behaviours, not just the right salary.