Brief Summary
This video reveals the 75/10/15 rule for managing money like the wealthy, regardless of income. It emphasizes spending less than 75% of income on needs and wants, saving 10% in a cushion fund for emergencies, and investing 15% for the future. The video also covers tax-advantaged investment accounts like Roth IRAs and 401(k)s, and recommends investing in index funds or ETFs for diversification and long-term growth.
- 75/10/15 rule for wealth building
- Importance of cushion fund and high-yield savings accounts
- Investing in Roth IRA and 401(k) for tax advantages
- Index funds and ETFs for diversification
The 75 in the 75/10/15 Rule
The 75/10/15 rule starts with allocating a maximum of 75% of your income for spending on housing, food, and other expenses. Spending less than this amount is encouraged. This limit promotes finding cheaper alternatives and focusing on value. Millionaires often look for happy hour specials and the cheapest options when dining out. Instead of cutting small purchases like coffee, focus on bigger expenses like cars or TVs, which provide only temporary happiness. If you spend less than 75%, hold on to the difference for investment.
The 10 in the 75/10/15 Rule
The 10% portion of the 75/10/15 rule is dedicated to saving for a cushion fund, which acts as a cash reserve for unexpected financial emergencies. It's important to differentiate emergencies from regular expenses or cravings. To determine the necessary amount for your cushion fund, calculate your monthly expenses and multiply that total by five. Store this fund in a high-yield savings account (HYSA) to earn higher interest rates compared to traditional savings accounts. Once the cushion fund goal is reached, stop saving and allocate that 10% to investments.
The 15 in the 75/10/15 Rule
The 15% in the 75/10/15 rule focuses on investing for the future to build assets and wealth. The traditional education system teaches how to make money from labor, but the wealthy generate income from assets. It's important to put your money to work.
The 2 Accounts To Start With
Two specific investment accounts with major tax advantages are the Roth IRA and the 401(k). A Roth IRA is an individual retirement account where earnings and profits grow tax-free, meaning withdrawals in retirement are not taxed. Contributions are made with after-tax dollars, and contribution limits apply ($7,000 per year if under 50, $8,000 if over 50 in 2024). To open and contribute to a Roth IRA, you need earned income, then open a Roth IRA account at a brokerage website, transfer money into the account, and purchase investments within the account. A 401(k) is an employer-sponsored account, meaning it's only available if your employer offers it. Contributions are made with pre-tax dollars, and taxes are paid upon withdrawal in retirement. The contribution limit is higher ($23,000 per year as of 2024), and many employers offer matching contributions, which is essentially free money.
But What Should YOU Invest In?
Investing in assets is crucial for wealth building. For most people, investing in an index fund or ETF is sufficient. Instead of investing in a single stock, an index fund or ETF allows you to invest in hundreds of different stocks, diversifying your money and reducing overall risk. For example, buying an S&P 500 index fund means you own a small percentage of every stock in the S&P 500, tracking the entire index. Index funds are a safe bet in retirement accounts, with an average return of about 8% per year over the past 80 years. The author invests in passively managed index funds like FXAIX or VOO.
