Finance YouTuber Jaspreet Singh (of “Minority Mindset” fame) recently created a popular video describing how the 1% manage their wealth. It all starts with increasing wealth through multiple streams of income.
One thing to keep in mind, however: The key is not so much how much money you earn but how you spend and save.
Singh and other finance experts promote the 75/15/10 rule for budgeting. It’s a simple concept — and as long as you are making enough money to make ends meet, you should be able follow this simple formula.
75% of Your Income (or Less) Should Be Directed to Living Expenses
You should try to organize your finances so that no more than 75% of your cash goes toward living expenses. This includes fixed expenses, such as your mortgage and car loan, as well as variable expenses like vacations, dining out and entertainment.
If you aren’t earning enough to cover your expenses — much less have 25% left over after your bills are paid — it’s time to look for ways to cut costs and increase your income.
You might review all your subscriptions and cancel some. You can downgrade to a less expensive car. In an extreme situation, you might want to move out of your apartment and live with family or friends while you save money or find ways to earn more money.
To boost your income, consider taking on a side gig or asking your boss for a raise.
15% of Funds Should Be Diverted to Investments
Singh emphasized the importance of income-earning assets. Once you’ve freed up 25% of your income, you should start investing in stocks, mutual funds, ETFs or even real estate.
Singh said: “The wealthiest people in this country don’t make their money from their job. They make their money from their assets.”
Look for dividend-producing investments which can help fund your retirement. If your company has a 401(k) plan with matching funds, take advantage of that “free” money. Roughly 35% of Americans work for an employer that offers a tax-deferred 401(k) retirement fund. If yours does not, or if you are self-employed, you’ll want to consider other options such as an IRA or SEP-IRA.
Passive income is the key, Singh detailed. At some point, perhaps even before retirement, you should be able to live off your passive income.
10% Needs To Head Toward Savings
Investing money for the future can help ensure a comfortable retirement. But it’s also important to have a short-term savings account for immediate emergency expenses. Experts like Singh recommend setting aside 10% of your income in a high-yield savings account (or money market) that is easy to access in an emergency.
You’ll want to pile money away until you have six months to a year’s worth of living expenses saved.
Earning More via a Second Job or Side Hustle
If you are living paycheck to paycheck, these tips might seem intimidating. The key is to build passive income from 15% of your income, Singh indicated. But if you don’t have a lot to invest, you have two choices to boost your passive income.
“If you want to increase the amount of passive income, you can do one of two things,” Singh said. “You can invest in riskier places to get a higher cash flow… or you can invest more money to get more cash flow.”
Even if you invest in riskier places, you will reach a cap on how much money you earn, he said. The solution to building real wealth is to earn more and invest those earnings.
“If you work right now to generate more money, you can take the income that you’ve built and use it to generate passive income,” Singh said.
For many people in today’s economy, this may involve a side gig or a new business venture.