In today’s economy, one of the most difficult aspects to navigate is how to allocate one’s earnings.
To be able to decide how much should go towards living expenses, how much should go towards fun things like outings with friends or even just coffee, and how much one should put away in order to ease any anxieties about the future.
At the end of the day, it can be hard to tell where all of one’s money went.
Sure the paycheck just came in, but with getting drinks and eating out from time to time, it seems like there’s little left over, and what’s left over can seem negligible, right?
Wrong!
That’s where the 10% rule for savings comes in.
Sure around 80-90% of our energy goes towards maintaining the status quo so to speak, i.e. 80-90% of what we earn goes into living expenses like rent and a nice dinner from time to time.
But one also has to make the most of the remaining 10-20%, because as it turns out, whatever wealth we may enjoy further down the road comes out of that 10-20%.
Given how much of a difference this 10-20% can make, it’s almost sad how it can be to squander it.
At the end of the day we just want to get home after work and kick back, relax a little.
But for the long run, this is no strategy, so one really just needs to make that extra push.
Think about it in terms of working out; the real difference from working out comes not the first several sets where we feel comfortable– those are sets that just maintain the status quo, that keep that flab at a not-so-unseemly level.
But in order to burn that flab down to a toned level that will give your partner the jimmies, it all comes down to that final set.
It’s the final set that really demands a push, and it’s that final set that really makes the difference.
So do that with the last 10-20% of your earnings.
What does one do with the final 10%?
It isn’t enough to just put it in a savings account.
To put all your leftover earnings in a savings account is really to overlook the secret of the modern economy– to put all your leftover earnings in a savings account is to neglect that essential secret that makes the rich only richer.
What I’m alluding to is the role that investing can play in one’s savings.
This example even comes up in the Bible.
Remember that parable of the master who gives his servants talents (money)?
One servant just buries his talent until his master returns and gives it back, but he is not the servant who is rewarded.
The servant who is rewarded is the one takes the talents his master gave him, and then uses them to earn even more talents.
The smart saver doesn’t just save his or her money, but rather invests that money in order to make more money; the smart saver puts the leftover money to work for themselves.
So, what we’ve established now is that one cannot just squander that leftover 10% of one’s earnings, but we’ve also made it clear that to save that final 10% in some sort of savings account is not enough either, or rather it’s far from the best use of that 10%.
What the smart saver does is puts their leftover earnings to work for them in order to create further earnings.
That is to say that the smart saver invests their money.
But how does one go about investing?
It isn’t some sort of obscure talent reserved for suits on Wall Street.
Well yes and no.
Perhaps those suits know a thing or two that the average person does not, but that information is also not secure in a vault but accessible if one just knows where to look. (Oh internet is there no end to your giving!)
The first step in becoming a smart investor is invest first and foremost in financial education.
How many of us know the difference between a balance sheet and an income statement?
How many know what boxes to check, so to speak, before investing?
Which is to say how many know enough to know when we are actually investing or just gambling?
Well take a moment to do some research, otherwise your investing will come across as only a less glamorous game of craps.
But don’t be discouraged either.
The jargon can become a bit of a headache, but after some time it becomes apparent that though the words are ones which one would seldom use day-to-day, the concepts behind them are rather straightforward.
This may seem somewhat contradictory, but an even smarter way to go about investing, however, is with money earned from a secondary stream of income.
The idea is that the more streams of income one has, the more stable are one’s earnings.
Several decades ago, it may have been sound business to have one job and stick to it alone, but nowadays the more prudent way to go is to diversify earnings.
This principle is one which also translates to one’s investment strategy.
To invest in a single stock or even single branch of stocks may translate to big money, or an indifferent amount of money, or a gigantic loss of money. So, bear that in mind when choosing what to go with.
What prudent investors go for today is to invest in a portfolio, and not just that but one has to build a portfolio of non-correlated stocks, in the same way as one should diversify one’s earnings across a portfolio of non-correlated incomes.
To close, let’s elaborate on the golden rule of wealth and savings.
We cannot iterate this enough.
When you do, you find yourself considering your expenses more carefully, and maybe realize there are some things you can do without.
Take cable TV for instance; how much would it take for you to cut the cord?
Now consider that in relation to how much that cut cord might give back.
Sure, you use cable to watch the news or watch the game, but how often do we really get our news from TV as opposed to some link online, and it might just be cheaper to subscribe to a streaming service online than invest in a device that will allow you to connect your computer or phone to your TV.
The list of these examples goes on and on.
To choose one, like to smoke?
Well, turns out hand rolled cigarettes could prove cheaper, among other things.
In sum
So, in sum let’s go back over what we have.
It’s easy, so easy to forget about the future.
It’s so easy just come home, kick off your shoes, crack open a beer, and let sleeping dogs lie.
But, in the long, you’ll find that this will bite you in the butt.
Yes, expenses are covered, yes you even have money to not just go out with friends, but also buy the first round.
This will not be enough.
For the long haul, one has to have a plan and living hand to mouth, just putting aside whatever you have leftover from the weekend.
Before you even begin to spend on friends, you should already have decided how much will go into your savings account, or better yet, into your investment portfolio.
Then at that point, from what remains you can spot your friends a round.
So sorry, might have to go with whatever’s on draft from time to time, but beggars can’t be choosers.
Simply saving then what you have left is not enough, but you have to make a conscious, considered decision about how much to save.
What we recommend is 10-20%
Hence, again, the 10% rule.
But not only that, we don’t just recommend putting 10% of your earnings in a savings account, but you should be doing what the smart saver does, you should be doing that trade secret of the rich; you should have your money work for you.
That’s right, money can’t just sit around, it shouldn’t.
Invest in a diverse portfolio and you will be thankful later.
But also, don’t go into investment blind.
Be aware of your options by investing in financial education.
But in the end, if all else fails, if it’s hard to meet that 10% rule, if it’s hard to even to begin to wrap your head around stock options, just follow the golden rule of savings and wealth: put away more money than you spend.
It can be difficult, but keep at it for a while and the results will become apparent, and once they do, you can go back and make sure you have your 10% rule and investment bases covered.
Just follow these simple steps and soon enough you’ll be on your way to wealth, and at the end of the day, do take that nap, you deserve it.
