Hello best life seekers!
Welcome to the Don’t Live Broke Series where we explain the secret money formula underpinning financial freedom and success. Each of the 7 Rules is a fundamental principle of wealth that demands the development of certain financial habits that will serve you throughout your best life. In Rule 2: The Midas Lifestyle we explained the 70% principle, aka the habit of spending your money wisely. In this article we now explain how and why to allocate the remaining 30% of your net income.
Rule 3: Make Money Work For You is all about creating a goose that will lay golden eggs from here on out for you. Once that starts to happen, you’ll never be broke again. You’ll gain financial flexibility and the freedom to do what you love. Does that sound fantastically awesome? Let’s see how it works.
Rule 3: Make Money Work for You
Here’s how the rule works: Put 30% of your net income into money-making investments. These assets will then generate new money and income streams for you. This formula of 30% of net income invested in money-making activities is the heart and soul of financial independence and freedom.
You want to be buying assets, not spending your hard-earned cash on ephemera that get you nowhere toward your lifestyle goals. Assets purchase you freedom. Without them, you wind up average and broke. For instance, did you know that almost half of all Americans (46%) spend MORE than they make each month and that on average, Americans save less than 5% of their income each month?
That’s a recipe for financial disaster and unachieved life goals.
Best life seekers, you don’t want to be average right? Right.
Put 30% of your net income into money-making investments. If you feel like debt is torpedoing your goals and lifestyle, check out these recommendations in Rule 3: Make Money Work for You – Debt Payoff Option.
New Mental Framework – Assets vs Liabilities
From the stats above, we can see that the average person is in poor financial condition. It’s a problem of mental framework more than anything. We’re taught to save for new cars or vacations, the kids’ education, a down payment on a house or our retirement. We’re not taught to purchase assets that will launch us out of the rat race and put us in charge of our finances rather than relying on a paycheck for the rest of our lives.
We need a better financial framework because clearly the one we’re imbibing from our society isn’t working. The 70/30 principle is that new framework.
To understand why the 70/30 principle is the winning framework, we must understand the difference between an asset and a liability.
An asset is anything that generates money for you. Some examples of assets include stocks and bonds, money you lend, real estate, and intellectual property rights. If it makes you money, it’s an asset.
Everything else is a liability because it depreciates or costs money to maintain. Simply put, if it’s not generating money for you it’s a liability and it’s not getting you out of the rat race or making you financially free. A good example is your car. It isn’t an asset but a liability because it depreciates and costs money to own. You may need a car but don’t ever make the mistake of considering it an asset.
Don’t buy liabilities with your 30% net income, buy assets. That’s how you’ll get ahead. Everyone else is spending their money on liabilities and that is why everyone else is broke. If you buy assets, you are increasing your income stream. That puts more money in your pocket without you doing anything to earn it. Which brings up the fantastic benefit of assets – you buy them and they basically go on producing money in perpetuity. You can spend the money they spit out or use it to buy more assets. I like to think of assets as the equivalent of the fairytale goose that lays golden eggs.
Best life seekers, don’t slaughter your goose by buying useless liabilities with your 30% net income. Buy assets – buy the gold-laying geese.
Putting Your Geese in a Row
The interesting thing about the average millionaire is that they rely on multiple streams of income and tend to be self-employed business owners. With multiple streams of income they can weather any economic downturn, as well as make even more money. Millionaires prefer to earn their wealth working for themselves doing something they love rather than work for others. Now that’s what we call living your best life, right?
Let’s take our investing tips for our 30% from the average millionaire and not the average broke American.
The three best ways to allocate our 30% net income and generate wealth are portfolio income schemes, passive income schemes and business investments.
- Portfolio income is money that comes from stocks, bonds, your 401K, IRA, or other investment accounts that tend to increase in value over time.
- Passive income arises from money you aren’t working to earn, though sometimes it requires an initial outlay of time and effort. Sources of passive income include interest from loans, rental income, royalties, and capital gains and dividends from investments. Other income could come from starting a side business that doesn’t involve active work, such as running a website or selling information products.
- Business investment isn’t an asset like what you would buy or create for passive and portfolio income. Instead, this is investing wisely in private enterprise – your business or someone else’s – to generate income like the millionaires do. Investing in yourself to add value to your skills can also be quite lucrative.
With the 30% principle you can do all sorts of things to make money. The choice is yours but always put your income toward money-generating projects. Ideally you want to allocate equally across portfolio, passive and business investments but your preferences and goals may vary. These numbers are not hard and fast but good guidelines. Generally, though, you want to always have passive income since portfolio income can fluctuate with the market. Steady rents or royalties or bond payments are always a good thing to have since if the market crashes, you may have less to draw from your portfolio and if you can’t work, you won’t be reliant on business income to support yourself.
Rule 3: Make Money Work For You – Wrap Up
Are you seeing why the 70% principle and 30% principle are so fantastic? Together, you are creating a mechanism that covers your needs plus extraneous discretionary spending under the 70% while generating the money-making side of your estate that creates your real fortune.
With 30% put aside, you can start your own business or side enterprise, cover retirement needs, and generate cash-flow to live on or supplement your current income. This generation of money can grow to the point where you are no longer reliant on a paycheck and isn’t that really the goal? Best life seekers, use the 70/30 principles to become financially free and start living the life of your dreams!
Next, examine another key habit in Rule 4: Stash Your Cash.
- The Don’t Live Broke Series Introduction
- Rule 1: Know Your Wealth
- Rule 2: The Midas Lifestyle
- Rule 3: Make Money Work for You
- Rule 3: Debt Payoff Option
- Rule 4: Stash Your Cash
- Rule 5: Don’t Dig Money Pits
- Rule 6: Body of the Gods
- Rule 7: Hustle
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