Question 1

What is the 28/36 rule for mortgage affordability?

Accepted Answer

The 28/36 rule states that your monthly mortgage payment should not exceed 28% of your gross monthly income, and your total monthly debt payments should not exceed 36%. For example, if you earn $10,000/month gross, your mortgage should be no more than $2,800, and total debt payments no more than $3,600. This rule helps ensure you have enough income to cover other living expenses and savings.

Question 2

Why does compound interest matter for long-term investing?

Accepted Answer

Compound interest means you earn returns on both your principal and accumulated interest. For example, $10,000 invested at 7% annual return grows to $76,123 after 30 years, but only $31,000 with simple interest. The longer the time horizon, the more powerful the compounding effect. Starting to invest in your 20s versus 30s can mean the difference of hundreds of thousands of dollars by retirement.

Question 3

How does the Rule of 72 help with investment planning?

Accepted Answer

The Rule of 72 is a quick mental math tool: divide 72 by your annual return percentage to estimate how many years it takes to double your money. For example, at 7% annual return, 72÷7≈10 years to double. At 5%, it takes about 14.4 years. This helps you evaluate investment options and understand the power of different return rates over time.

Question 4

How much do I need to retire?

Accepted Answer

A common rule is the 4% rule: multiply your annual spending by 25 to get your needed retirement portfolio. For example, if you spend $50,000/year, you need $1.25 million invested. This assumes 4% annual withdrawals and accounts for inflation. However, this is a general guideline—actual needs depend on your spending, life expectancy, healthcare costs, and market conditions.

Question 5

How does inflation erode purchasing power?

Accepted Answer

Inflation reduces what money can buy over time. If inflation averages 3% annually, $100,000 today is worth only $74,137 in 10 years in terms of purchasing power. This is why investing in assets that outpace inflation (stocks historically average 10% returns) is crucial for long-term wealth building. Savings accounts earning 1% return lag inflation and actually lose purchasing power.

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