75115 Rule for Wealth Management

Jul 24, 2024

75115 Rule for Wealth Management

Overview

  • The 75115 Rule is a system designed to manage money effectively, applicable regardless of income.

Breakdown of the 75115 Rule

  1. 75% Spending Limit

    • Max spending: 75% of every dollar earned.
    • Encourages a focus on cheaper alternatives and value for money.
    • Example observations from wealthy individuals' dining habits:
      • Asking for happy hour specials.
      • Splitting bills accurately.

  2. 10% Savings Requirement

    • Save at least 10% of every dollar earned.
    • Cushion Fund: Essential for financial emergencies.
      • Definition: Money set aside for unforeseen expenses, such as a car accident or major repairs.
      • Recommendation: Save 5 months of expenses in your cushion fund.
      • Use high-yield savings accounts for better interest rates.
        • Traditional savings: ~0.5% APY (e.g., $10,000 gives $57 interest/year).
        • High-yield savings: ~4% APY (e.g., $10,000 gives $400 interest/year).
    • Once the cushion fund is established, stop saving further and hold onto the saved amount.

  3. 15% Investment Goal

    • Invest at least 15% of every dollar earned for future growth.
    • Focus on building assets over merely earning salary.
    • Recommended investment vehicles:
      • Roth IRA: Tax-free growth, contributions made after taxes. Limit: $7,000/year if under 50; $8,000 if over.
        • Steps to open a Roth IRA:
          1. Have earned income.
          2. Open account via a brokerage (e.g., Fidelity, Schwab, Vanguard).
          3. Transfer money to the Roth IRA.
          4. Invest within the account to see growth.
      • 401K: Employer-sponsored, pre-tax contributions, potentially with employer match. Limit: $23,000/year as of 2024.
        • Example of employer matching: If contributing 5%, employer may match a portion.
        • Important to explore various index funds and ETFs for investments.

Investment Strategies

  • Consider low-cost index funds or ETFs for broad market exposure and reduced risk.
  • Example: Investing in an S&P 500 index fund provides diversification across top U.S. companies.
  • Historically, index funds return ~8% annually on average over time.

Conclusion

  • Investing focuses on making money work over time, avoiding the trap of only earning through jobs.
  • Encourage diversification through indexed investments while continuously learning about finance and investment strategies.