You may be familiar with the 50/30/20 rule, the classic budgeting rule that mandates that you should spend 50% of your income on needs, 30% on wants and put 20% into savings. But Grant Cardone, author of the upcoming book “The Wealth Creation Formula,” suggests an alternative ratio that’s better suited to building wealth.
Here’s why Cardone swears by the 40/40/20 rule.
What Is Grant Cardone’s 40/40/20 Rule?
Cardone’s 40/40/20 rule is part of his overall wealth creation formula, which says that you should earn as much income as possible and save as much of that income as possible until you can afford to invest in income-producing assets. Then, use profits from those assets to invest in more income-producing assets to scale your wealth.
The 40/40/20 rule comes in during the saving phase of his wealth creation formula. Cardone says that from your gross income, 40% should be set aside for taxes, 40% should be saved, and you should live off of the remaining 20%.
Why the 40/40/20 Rule Works
Cardone said that the 40/40/20 rule has a proven track record of success.
“If you would save 40% of your gross revenue and use that to invest — not to live — I guarantee you’ll create wealth for yourself,” Cardone told GOBankingRates. “You can go back to 1929 and study wealthy families who were investing 40% of their gross income.”
Living off just 20% of your gross income will prevent you from frivolous spending, particularly when you start earning a larger salary and are prone to “lifestyle creep.”
“It ensures that you’re not spending money prematurely, that you’re not spending money on things before you should be,” Cardone said. “You’re not going to go buy the Gucci loafers because you don’t have any money. But you will have investments.”
This rule may seem hard to stick to, especially if you are not earning a high salary.
“A lot of people are going to say, ‘That’s going to be impossible. I make $4,000 a month. You’re telling me to take $1,600 a month off the top and use that for investments?’ Yes, that’s what I’m telling you,” Cardone said. “You’ve got to live off the remainder. You’ve got to live off 20%.”
Because this will be difficult, it will incentivize you to earn more, Cardone said.
“What are you forced to do when you don’t have enough money? You’ve got to earn more money,” he said. “This is what forces somebody’s income to go up. It will force you to find creative ways to get more income.”
Even if you do only set aside $1,600 per month, this will still add up over time.
“By the end of the first year, you would have over $19,000 in an investment account. In 10 years, they would have $190,000 if their income didn’t go up — but their income would have to go up, because you can’t live on $2,400 a month,” Cardone said. “Everybody can do this.”
More From GOBankingRates