This rule is designed to help anyone manage their finances effectively, regardless of income level.
The rule is divided into three parts based on percentages of income: 75%, 10%, and 15%.
75: Spending Limit
75% of income: Maximum amount you can spend.
Includes housing, food, vacations, miscellaneous items.
Encourages finding cheaper alternatives and focusing on value.
Value Focus: Instead of cutting small expenses (e.g. $5 coffee), focus on bigger expenses that might offer less value over time.
10: Cushion Fund
10% of income: Set aside for a cushion fund (emergency fund).
Purpose: For financial emergencies only (not for leisure activities like vacations or nights out).
Example: Car accident costs covered by cushion fund.
Goal: Save for 5 months' worth of expenses (e.g., $2,000 monthly expenses x 5 = $10,000 cushion fund).
High-Yield Savings Accounts: Better interest rates compared to traditional savings accounts, allowing your cushion fund to grow faster.
When to Stop Saving: Once the cushion fund goal is met, stop saving more into this fund.
15: Future Investments
15% of income: Invest for future wealth-building.
Investment Accounts:
Roth IRA: Offers tax-free growth on earnings and profits. Contributions are made with post-tax income. Limits on contributions: $7,000/year (under 50) or $8,000/year (over 50).
Steps to open: Earned income, open an account with a brokerage (Fidelity, Schwab, Vanguard), transfer funds, and invest in assets.
401(k): Employer-sponsored, uses pre-tax income, contributions taxed on withdrawal. Contributions limits: $23,000/year (as of 2024).
Employer Matching: Free money from employers, often matching contributions up to a certain percentage.
Importance of Wealth-Building Assets
Assets vs. Labor: Real wealth is built through owning assets, not just from high-paying jobs.
Books & Learning: Key books include 'Rich Dad Poor Dad,' 'Psychology of Money,' 'The Intelligent Investor.' Learning about investments is crucial.
Investment Strategy
Index Funds and ETFs: Suggested as reliable, low-maintenance investments.
Example: S&P 500 Index Fund offers diversification, typically returns ~8% annually over time.
Set-and-forget approach: Maintains portfolio value and mitigates risk through diversification.
Final Thoughts
Addressing the sense of not doing enough financially.
Emphasis on avoiding wasteful spending and making informed financial decisions.
Additional Resource
Mention of a tool (Savings Goal Tracker) offered for free to help visualize savings progress.
Actionable Steps
Spend less than 75% of your income, focusing on value and bigger expenses.
Save 10% for a cushion fund, stored in a high-yield savings account.
Invest 15% in Roth IRA or 401(k), focusing on index funds or ETFs for diversification and growth.