The 70/30 Rule
This is something I incorporated into our budgeting plan over 36 years ago when Elaine and I first got married.
The ABCs of investing is a derivative of the 70/30 Rule. Together, they answer the question, “How do I get started?”
The mistake most people make is assuming they must be out of debt before they start investing. In doing so, they miss out on the number one key to success in investing: TIME.
(See Time, Return Resources)
The 70/30 Rule is simple: Live on 70% of your income, save 20%, and give 10% to your Church, or favorite charity.
This has many benefits in addition to saving 20% of your income.
Let’s say you are a two-income family – both making $60,000 per year, or $120,000 household income; but you’re only spending 70% of that, or $84,000.
If your A-Bucket has 3-6 months of living expenses ($30,000 - $50,000) + 5%, or $500 per month, you can ride the storm of a job loss by one of the two earners for over a year.
$60,000 income plus $30,000 in savings will more than cover your $84 000 living expenses for the year. That’s called peace of mind!
And if your B-Bucket has 1 to 2 years’ income ($120,000+), + 5% or $500 per month, you could make it another 3-5 years. That’s called financial security!
But the real benefit is your C-Bucket. Assuming household income of $120,000, you will need $3,000,000 in your C-Bucket to retire (See 25 Times Income – 4 X 8 Rule)
Using my website: www.frontlinefinancialsvc.com, Calculator/Savings and Accumulation
Assume you start putting 10% of your income, or $12,000 per year in a 401K or IRA at age 22, the year you finish college, or the year you pass your journeyman’s exam as a plumber or electrician. You work until you’re 67 and achieve an average growth rate of 8%, your C-Bucket will be worth $4,638,067 (See attached report).
Applying the 4 x 8 rule, or a 4% income distribution (See 25 Times Income – 4 x 8 Rule), 4% of $4,638,067 = $185,522 in Retirement income.
That’s almost magic, and it’s how most people achieve financial independence. It’s not the “hot stock tip,” or always being the #1 funds. It’s consistent savings with average returns over time. It’s the tortoise that wins the race! (See Time, Resources, Return) And, you did it while giving 10% to your Church or favorite charity.
All examples/projections are hypothetical and do not take in consideration the effects of taxation and are for illustrative purposes only.
Securities and advisory services offered through LPL Financial, a registered investment advisor. Member FINRA/SIPC.
I bring over three decades of experience and expertise in financial planning and investment strategies to the table. My journey began 36 years ago when I, alongside my wife Elaine, incorporated the 70/30 Rule into our budgeting plan. This rule, which I consider foundational to successful investing, has been a guiding principle throughout my career.
The 70/30 Rule is a straightforward approach: live on 70% of your income, save 20%, and allocate 10% to your Church or favorite charity. This rule isn't just about budgeting; it's a philosophy that recognizes the importance of time in the realm of investing. Many individuals mistakenly believe they must be debt-free before they start investing, but the key to success lies in utilizing time as an asset.
By living on a portion of your income and saving the rest, you not only build a financial safety net but also set the stage for future financial security. The article discusses the three buckets – A, B, and C – where the A-Bucket covers short-term living expenses, the B-Bucket provides a buffer for longer periods, and the C-Bucket is the retirement fund.
The C-Bucket, crucial for retirement, is projected based on consistent savings and average returns over time. The article illustrates this through an example: if you start putting 10% of your income into a retirement account at age 22 and achieve an average growth rate of 8%, your C-Bucket can grow significantly. Following the 4 x 8 rule, a 4% income distribution from this bucket during retirement could provide substantial income, showcasing the power of long-term, consistent savings.
The emphasis here is on disciplined, steady contributions rather than chasing hot stock tips or always investing in the top-performing funds. It's a testament to the adage that the tortoise wins the race – slow and steady wins the financial independence race.
For those interested in further details and calculations, the article refers to a website (www.frontlinefinancialsvc.com) where a calculator and accumulation report are available for a more in-depth analysis. It's important to note that all examples and projections in the article are hypothetical and for illustrative purposes only.
In conclusion, the 70/30 Rule, combined with the ABCs of investing, serves as a practical guide for anyone wondering how to get started on the path to financial success. It's a timeless principle that I have not only advocated but also incorporated into my own financial journey.
