Building wealth and happiness with the 80-20 Rule

If you are under age 30, you have a great opportunity to retire wealthy. But even if you are older, an easily understood principle can reduce the stress and anxiety that not having enough money is bringing you.

The 80-20 rule is the key to happiness and wealth.

The rule is simple and easy to understand. Designate 80% of your income for your living expenses, and designate the other 20% to savings and investing. It is that simple. It’s not easy to get to that point, but once you do, the process is painless, and the stress and anxiety you are feeling will be gone. These are the steps of the process:

1. Commit to reduce your standard of living. If everything you are making is going to support your lifestyle, with nothing left over for savings or investing, then you are living beyond your means. If you are making $40,000 a year, adjust your lifestyle to live on $32,000 a year. If you are making $20,000 a year, resolve to live on $16,000 a year.
2. Commit to monthly saving. You have probably taken on heft debt, and are unable to begin setting aside 20% of your income towards savings and investment. That’s fine for now. If you need to, decide to set aside 5% to begin with. And make that payment the NUMBER ONE PRIORITY. If you have to not pay other bills, then deal with it, but make your savings/investment funds the first thing you pay.
3. Pore over your budget. A budget isn’t a big secret. It is simply putting down your monthly expenses and comparing it to your income. There are all kinds of free sample budgets online. Google “home budget.” To really know what you are spending, add up all of your expenses for the past four months. Some bills are static and never change such as loan payments, cable and internet, etc. Other bills, such as groceries or car gas fluctuate, so just average the past four months to get an accurate picture. Then use your imagination after you find out where your money is going. Is there anything that you can cut out? Starbucks? Eating out? Lower TV Cable plan? More Economical cell phone plan? Better Insurance rates?
4. Attack your overall debt. Learn about interest. Interest can keep you poor or it can work for you. Find out the APR (annual percentage rate) of each of your credit cards. Most are 21% or higher. See each of those cards as a loan. Your goal is to get the very best rate possible. You can call up the credit card customer service and ask for a lower rate, but you’ll probably have very little luck. A wise move would be to secure a loan from your bank and pay off the card and/or cards. Yes, you’re trading one monthly payment for another. But, your bank will loan you the funds at 9% or possibly even at a lower rate. WARNING: If you pay off your credit cards, do NOT charge anything on your cards. NO NEW DEBT! I recommend cutting up most of your cards and cancelling all of your accounts, keeping one active for emergencies, keeping zero balance. Once you have the lowest possible interest rates on your loans, do what you can to pay them off as quickly as possible. A good strategy is to pay the minimum payments on all your loans except the one with the highest APR. Make double or even triple payments on that card or loan until it is paid off. Then move on to the card or loan with the next highest interest rate, and apply your newly freed cash flow to paying off that card, and so forth and so on.
5. Create an emergency fund. One of the quickest ways of increasing debt is to use our credit cards for emergencies. Water heaters, car repairs, new roof, kids ER visit are just a few of the things that pop up. When we use our credit card we are taking out a loan at 21% interest. The creation of an emergency savings fund will save you all of that interest and a boatload of worry. Make the creation of an emergency fund your first savings priority, even if it’s only $1,000.00. I keep a $3,000.00 emergency fund in a high yield savings account for items like those.
6. Use gifts and tax refunds to lower debt or increase savings. I’ve talked with so many people who can’t wait to get their tax refund so they can go out and buy a new seadoo, or put a downpayment on a new car, or take a trip to Vegas. They have a sense of entitlement. Rather than spending your refund, apply it towards your debt. You might be able to actually pay off a loan or credit card, thereby increasing your monthly cash flow and reducing stress. Oftentimes we will receive surprise gifts. Apply such gifts towards paying off debt. At the LEAST, apply discretionary funds towards a goal. You want to take a cruise? Great, save up first. Taking a cruise that is already paid for makes it so much more enjoyable.

Over time, you will get to the pint where you are living on 80% of your income, and saving and investing 20% of your income. Ideally, you’ll do this for 40 years, over the course of your adult life. If so, you’ll retire with lots of money. But even if you only do this for a few years, it will increase your net worth and help you prepare for retirement.

I once read that the key to evolution is time and pressure. Well, the key to riches is time and attention. Save just a little here and there and do it for years, and you’ll be in great shape, stress free and happy. Good Luck!