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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.
This article is about Budgeting Wednesday, 19th July 2006 (by J.D. Roth)
July 20th, 2006 at 8:28 am
Have you ever checked out the 60% solution article on MSN Money? This post reminded me of some of what that was talking about.
July 20th, 2006 at 10:07 am
Invest 20% of what you earn - is that net or gross?
July 20th, 2006 at 1:33 pm
What if saving 20% makes it impossible to buy a home with the remaining 80%? This is what’s on my mind and no one seems to be talking about it.
July 20th, 2006 at 4:09 pm
Then you probably cant afford to buy a home. Look at it this way, if you can only “afford” to buy a home using 100% of you income and you never save anything, then how are you going to put money aside for emergengies, or save for retirement, or have kids or any of that other stuff that people do with their money?
July 21st, 2006 at 10:36 am
Mike,
Tobias has an interesting approach with regard to your question. Somewhere, probably nearby, maybe even in your neighborhood, there’s somebody who makes less than you (maybe 20%), who is managing to save money, managing to pay for a home, and who doesn’t feel deprived. Live like *them*.
Ratchet down your lifestyle a little bit. We bought 2 cars last February. While we could afford Acuras (we were looking at the TL and TSX models), we bought Hondas (the Accord (6-cyl) and Civic). And we’re perfectly *happy* not having the more expensive cars. Heck, I’m happy not having to fill the tank with premium gas! The cars we got rid of had 11 years/211K miles and 14 years/130K miles on them respectively.
A large part of this site is about economy and getting the most out of the money you spend. If you manage to apply only a part of what you read here, there’s a good chance you can put away that 20% and still eventually earn enough to buy that home you want. It may not be the fanciest home on the block. It may need work. But it’ll be yours and it will be the foundation for moving up later. Don’t forget, part of what you put into savings (like a 401(k), you get back in taxes. Part of what you put into mortgage payments, you get back in taxes. Run the numbers and figure out how to make it work.
July 22nd, 2006 at 11:42 pm
[...] Optimus Prime voice actor chosen for Transformers movie. Johnny Cash on Sesame Street New trailer for The Fountain. Get Rich Slowly, An Effective Three-Step Budget Diary of a girl from 1930s discarded, discovered and reuunited with its owner. Filed under: Interesting, Links Posted by Mark on 07.23.06 | Related Entries [...]
July 26th, 2006 at 7:32 am
[...] It turns out that Tyagi doesn’t have anything against saving money on the little things. In fact, she believes that some people need to cut the little expenses, which she terms Wants. She recommends a budget structured thusly: 50% of after-tax money spent on Needs, 30% on Wants, and 20% on Savings. She says that if any of these are out of balance, you’re not financially healthy. (Note that this is a refinement of the Andrew Tobias three-step budget.) [...]
November 9th, 2006 at 7:11 am
[...] You can read more on budgeting and investing here in a ’simple’ 3-step plan to growing rich slowly. [...]
January 3rd, 2007 at 7:31 am
This magical 20%… does this include emergency savings/high-yield savings or should that be taken from the regular 80%?
April 9th, 2007 at 10:39 pm
Look, take the 20% out first. Gross, net … it doesn’t make any difference. Just choose one and stick with it. It’s what comes next that matters and what comes next is this: learn to live on the remainder.
Or deal with the consequences that are the natural result of ignoring sound financial advice … like I, at age 55, am.
January 7th, 2008 at 5:01 am
[...] for your money. There are a variety of budgeting methods you can choose, from Andrew Tobias’ three-step budget to the 60% budget. Last October, I wrote about the spending plan, a budgeting method for [...]
July 5th, 2008 at 9:30 am
Have you guys played the Tower defense game. It’s a great game. Teach you about savings…. You need to budget your money to buy just enough towers to kill the waves (enemies) and you need to save some money to generate interest. At the later part of the game, you can spend a lot of money for expensive towers since the money you save at the beginning of the game keeps generating interests. Sometimes you have to slowdown to get fast results. So get rich slowly. You’d be surpise how fast it could get. I am not reach yet but I have a healthy bank account. Life’s not that great, I get depressed a lot of times but you need persistence and perseverance if you want to get rich.