Use the Rule of 10 to Rate Current Purchases Against Your Retirement

It's not just easy to only think about the present when making purchase decisions, it's human nature. However, if you want to gauge how much your future self will be kicking you for buying that fancy gadget, multiply the purchase price by ten.

While this isn't exactly an investment guarantee, a reasonable bet for a return on a properly invested retirement account is ten dollars in 40 years for every one dollar invested now. Alternatively, if you'd prefer to look at the shorter term, you can count three dollars in 20 years for every one now. Finance blog Budgets Are Sexy breaks down the math:

The historical rate of return of the S&P 500, the most common benchmark for the stock market and index funds that follow it, is around 9% per year. Equities are a decent investment to stay ahead of inflation over the long term, since the rate of return is generally superior. This is primarily because when prices rise, it's those companies that are the ones raising their prices while also using their profits to grow their businesses and pay dividends to shareholders. Jeremy Siegel, a professor of finance at the University of Pennsylvania and author ofStocks for the Long Run, has argued that stocks consistently return around 6.6% per year after inflation over a long period of time. Of course, there will be volatility over the short and medium terms.

If we round down, and suppose that stocks offer a rate of return of 9% while the inflation rate during that period is 3%, then we're looking at a real annual rate of return on our purchasing power of 6%.

For every dollar you have today that you let compound at a real rate of return of 6% per year, you'll have slightly over ten dollars in 40 years. This is according to the historical performance (which we can never be projected into the future for certain), and is adjusted for inflation to represent a real tenfold increase in purchasing power.

Of course, you can't necessarily use this to decide whether or not you should buy something at the newly-adjusted face value now (virtually no one would pay ten times as much for a product for no reason), but it does put a serious spin on frivolous purchases. If you just bought a tablet last year and are thinking about buying another one now, ask yourself: would you rather spend $500 on a second slate now, or have $5,000 in 40 years?

The Mighty "10 Rule" | Budgets Are Sexy

Photo by Tyler.