Money Management: The 15-65-20 System

Introduction

• Effective money management is crucial regardless of income level.
• The 15-65-20 system is a simple approach to managing money like a financial expert.

The 15%: Saving and Investing

Importance of Saving 15%

• Peace of Mind: Helps in emergencies (e.g., medical bills, family emergencies) without financial stress.
  • Start by saving enough for one month of essential expenses, then build up to three to six months.
  • Essential expenses include rent, mortgage, groceries, transportation, and utilities.
• Make Money Work for You: Start investing early to utilize the power of compound interest.
  • Example: Janet vs. Mike scenario highlights the benefits of early investment and compound growth.

Investment Strategies

• Workplace Retirement Plan: Take advantage of employer matches (e.g., 5% match on $50,000 salary).
  • Ensure contributions are pre-tax, growing tax-free until withdrawal.
• Tax-Advantaged Accounts: Use accounts like the UK Stocks and Shares ISA or US Roth IRA for tax-free growth.
  • Maximize these accounts before using regular taxable accounts.

Investment Options

• Passive Funds: Track the overall stock market with low fees.
  • Diversify investments across many companies, reducing risk.
  • Adopt a “set it and forget it” strategy.

The 65%: Covering Fundamental Expenses

Managing Essential Expenses

• Allocate 65% of income towards essential expenses like housing, utilities, and transportation.
• Avoid lifestyle inflation (e.g., upgrading homes or cars with income increases).

Expense Optimization

• Identify and manage largest spending categories (housing 19%, transportation 14%).
• Look for cost-saving opportunities (e.g., better rent deal, affordable commuting options).

The 20%: Enjoyment and Personal Fulfillment

Importance of Enjoyment

• Use 20% of income for personal enjoyment to avoid financial burnout.
• Treat this spending as an investment in personal well-being.

Application

• Allow for guilt-free spending on hobbies, leisure, or even luxury purchases.
• Maintain a balance to enhance motivation and adherence to financial goals.

Conclusion

• The 15-65-20 rule provides a structured approach to manage money like the top 1%.
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Additional Resources

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