Read time - Less than 5 minutes
“Save up on that latte!”, as the Instagram influencer screams.
If you ever took that advice, you know how bad it feels to be really tight with your spending.
In this week’s newsletter, I’m going to explain a better money rule…
And continue buying your latte.
You see, penny-pinching (being strict on every penny) is unsustainable:
Today you held back on that latte
Tomorrow you managed to do it again
The day after you start giving yourself a “cheat day”
This habit stops, and you resume your old life.
Here’s a better money habit to try, and it’s called the 60/20/20 rule.
This is not some kind of financial guru tactic, it is a simple rule that produces results.
My friend here bought his dream bike in full cash just by following this rule:
Whenever you receive money, divide it into 60/20/20:
60% (Expenses)
Use this portion to pay your bills and transport, food, eat-outs and other things you enjoy.
If you're having difficulties fitting your expenses in 60%, you can either cut back on your subscriptions (data plans, Netflix, Spotify, gym etc.) or increase your earnings by switching jobs or getting a pay raise.
The key here is to spend extravagantly on things you love and cut costs mercilessly on things you don’t.
20% (Savings)
Use this portion to save for a rainy day.
I disagree with some financial gurus who say "saving is for losers".
No, saving plays an important role in our lives.
Having been born into a low-income family, I learned that savings buy you many intrinsic things:
More time to choose the jobs you want
The ability to take a long break from work
Independence instead of being overly reliant on your job income
Worry-free life instead of being stressed during emergencies
There are many benefits of saving, not just a vacation or a new television.
20% (Investments)
Use this portion to make money work for you.
This is income without you actively working, it’s the mechanism behind the rich.
Investing has become a complicated cliché, especially with social media and marketing these days.
But it doesn't have to be that way, because ever since index funds like the S&P 500 were offered to the public, it democratised investing.
By periodically investing in an index fund, the know-nothing investor can outperform most investment professionals.
— Warren Buffett
Conclusion
To recap, this is the breakdown of the 60/20/20 rule:
60% Expenses
20% Savings
20% Investments
If you can apply this rule consistently each time you receive an income, you will be much better off financially than saving on a cup of latte.
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