Set up a plan where you do the following:
- Invest 50% of your salary for your future
- Set aside 25% for taxes
- Spend the remaining 25%
Assuming you make $500,000 in a year, you should:
- Invest $250,000 for your future
- Set aside $125,000 for taxes
- Spend the remaining $125,000
Let's take a look at how the 50/25/25 PlanTM works. First, you would create a receiver account for all of your pay to go into. 50% of all the money deposited into this account would automatically go into an investment account. Another 25% would automatically go into a savings account to pay for taxes. The remaining 25% would go into an account that you could use to pay all of your expenses. Think of these accounts as separate buckets of money which will be used for different purposes. More importantly, you should only spend money from the "Spend" bucket. No exceptions - period.
Now that I have my buckets of money, how do I know how much I can spend on what? For example, how much can I afford to spend on a house or car? How much money can I just blow on my friends and family and having fun?
The above example shows how much you can afford to spend on a house, car, bills, and everything else while sticking to your financial plan. Assuming you make $500,000 in year one, you should buy a house that costs no more than $289,710 and a car that costs no more than $43,472.
If you follow the 50/25/25 PlanTM you will build wealth. It is critical that you spend no more than 25% of your earnings in any given year when playing. If 25% of your earnings is $125,000 and you want to spend more, then play hard and get noticed. If you want to spend more, then you need to earn more - it is that simple.