Budgets can be intimidating, especially to somebody just beginning to gain control of her personal finances. So many things to track, so many concepts to learn. And it’s all so tedious. In The Only Investment Guide You’ll Ever Need, Andrew Tobias offers the following simple yet effective budget:
- Destroy all your credit cards.
- Invest 20% of all that you earn. And never touch it.
- Live on the remaining 80%, no matter what.
Though Tobias is being glib, this is actually an excellent system. If you can develop the discipline to follow just these three steps, you can become rich.
By destroying your credit cards, you are removing the temptation to spend money you do not have. You are eliminating a major source of identity theft. You are also adopting a way of life. I destroyed all of my credit cards several years ago; the process was liberating.
If you invest 20% of all that you earn and never touch it, the magic of compound returns will cause your investment to grow, to multiply. You will create a nest egg for retirement, bring financial independence nearer. I’m working toward a 10% investment rate, which I plan to increase to 20% when my home equity loan is eliminated.
Do these two things and the remaining 80% of your income can be spent as you see fit. Trim your expenses so that this money can cover them. Reduce your expenses even more so that you can save for major purchases, or so that you can afford to indulge in hobbies and recreation. For the past two months, I’ve actually lived well below my means, and my bank accounts are beginning to accumulate money. It’s awesome.
Use this three-step budget and wealth will come to you.
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