How you manage money matters as much as your income — Tip #11
If you make 1B but spend 1B, you are still at zero 🤡
Given the success of last week’s tip, today we’re doubling down on personal finance. In case you missed the previous piece, here it is again 👇
In my quest for early retirement, one critical piece of the puzzle was managing my money. I kept my framework simple: spend as little as possible and invest as much as I could. This approach paid off but not many people are willing to sacrifice for 10–15 years to achieve that goal. Most prefer a more balanced approach.
This is what led many personal finance advisors to think deeply about this problem and come up with countless strategies and frameworks. In the spirit of Don’t Panic (yours truly 🫶), we’ll focus on the one that is most widely accepted as the best overall for most cases. Personal finance, as the name suggests, is personal. So always assess your own situation and feel free to ask questions in the comments if you have any doubts.
In 2005, US Senator Elizabeth Warren, former law professor and bankruptcy expert, wrote a book titled All Your Worth: The Ultimate Lifetime Money Plan, where she introduced the 50/30/20 budgeting rule. Her goal was to help American families from the working class build wealth. This rule helps you allocate your money as soon as you receive a paycheck.
Let’s break it down:
🏠 50% Needs: housing, bills, groceries etc.
🎡 30% Wants: movie ticket, a new dress you don’t really need, etc.
🏦 20% Savings: paying off debt, investing, etc.
One important caveat Elizabeth mentioned is that “needs” and “wants” are individual. An example? I generally categorize my gym membership as a need, whereas some people would consider it a want. My rationale is that I don’t want to live a life without exercise. Could I work out at a park without a gym membership? Sure, but that’s not my cup of tea and I wouldn’t exercise if I didn’t have a gym. Make sure the categories reflect your true needs and wants.
Here are some example breakdown based on income (after-tax 👮)
Your weekly tip: Confused about how to best allocate your money? Divide your net (after tax) income into needs (50%), wants (30%) and savings (20%) and spend accordingly.
Don’t forget to share this tip with a friend: you don’t want them to be broke 🫰
See you next week, until then…
Don’t Panic 😱