What is the 40 percent rule? Well, for starters, it’s a game changer when it comes to building wealth. I have read over 100 books on investing and personal finance. I don’t recall coming across the 40 percent rule. I discovered the rule by reading The millionaire’s playbook by Grant Cardone.
I was thrilled when I read it. It offers a different perspective on wealth creation. An aggressive game plan to help you become a millionaire. One concept is saving to invest. Don’t save to save. That’s where the 40% rule comes in. Save 40% of your gross income and put it in your “Sacred beads” until you are ready to invest it to generate more income. Sacred accounts are accounts where you never touch the money.
40% of your income is a major part of your paycheck. That’s a big lifestyle change, especially if you live paycheck to paycheck and have significant debt. This will leave you broke most of the time, but this is how the rich build their wealth. This is how the rich stay … RICH.
Rich against rich
There is a difference between rich and rich. You get rich before you get rich and, as Chris Rock said, “the ballplayer is rich, the one who pays the ballplayer is rich.” Bruckminster Fuller said that wealth is measured in time. How long can you not work while your assets generate income? Wealth produces more wealth and can withstand economic downturns. Look at how many people stayed rich during the past recession.
How to do the 40 percent rule
First decide that you are going to start building wealth. It is simple, not easy. Take baby steps. At first I could not save 40% and I was already allocating 20% of my income to pay my debts. So I started with 4%. That was manageable and I gradually worked my way up. Now it’s automatic and I don’t even miss it.
If you read The richest man in Babylon, by George S. Clauson, then you are familiar with, “A part of everything you earn is yours to keep”. Saving 10% of your income and 20% to pay your debts. Now just increase your savings by up to 40%. As I mentioned earlier, it is a game changer.
Sacred beads
Remember this is wealth creation. You are saving so that you can invest in income-generating assets. This will take time. Use time wisely. Research the investments that will produce the most sources of income. I chose the real estate sector because it is not a fad and it depends on technology. People need to buy, eat and live. The real estate sector takes care of that.
Emergency fund
I suggest you have an emergency fund. Start with $ 1000. It’s for emergencies only. Life always brings crisis several times a year. But since I had an emergency fund, I have not had any financial emergencies. I have had this for several years. I’ve never had to dive into it. This is not an investment. It is cash to deal with the unexpected.
Your income increases
Save all your bonuses, raises, and income spikes. Put that in your holy accounts. You don’t want expenses to increase to cover income. Keep driving a gap between expenses and income. Put all your increases in the sacred accounts.
The Trigger Sweater
After a while you will have enough to start investing. I don’t know how long it will take. I know my mentor saved for 8 years before pulling the trigger. He turned that investment into a $ 5 million profit a couple of years later. He pulled the trigger after feeling safe and made sure he could get his money back. This is not gambling.
He got a great offer because he had access to cash. Money loves speed and when you have liquidity you can take advantage of opportunities. Every day there are incredible deals that people miss out on because they don’t have access to capital. That is why saving to invest is so important.
Just start
This is what you should do now:
1. Open your sacred accounts. (I have one for real estate and business investments). Choose accounts where you will not have immediate access to money. Online savings accounts are great and pay higher interest rates.
2. Decide how much to save. Start with your first salary, commission, or any other income. Even if it’s 1%, that’s better than nothing. It’s easier if you have automatic deductions. That way you won’t miss it.
3. This is an activity for a lifetime. Continue until you die.