Senator Elizabeth Warren had popularised this concept of 50-20-30 in her book “All your worth, The Ultimate lifetime money plan”. This rule basically talks about dividing the after-tax income in the ratio of 50% for Needs, 20% for Investments and 30% for wants.
Now what are needs?
Needs are those payouts without which your survival is at stake like food, shelter, medical, loan instalments etc.
What are wants?
Wants are those which you would aspire / dream to have like holiday, entertainment, better vehicle, better home, dining , shopping etc.
According to this rule, in order to be financially independent, one must fund atleast 20% of post-tax income into long term investment products.
Robert Kiyosaki, the author of book “Rich Dad Poor Dad” says in order to migrate from Poor / Middle class to Rich, the first habit to develop is to fund yourself & build assets coloumn of balance sheet so that the money starts working for you, rather you working for money.
Let me explain you in short what is assets / liabilities side of balance sheet. Assets are those which you own and which has financial value. Eg : Cash, investments, land , gold etc
Liabilities are those where you owe money to some one. Eg : Loans
In this book, Robert Kiyosaki also says “Earned income is money you work for, and passive & portfolio income is money working for you”. Make the money work for you rather than you working for money.
Which means the money earned out of your daily job is your earned income for the services provided by you. This is your active income, while the income earned by your investments in the form interest, dividend etc is your passive income. Active income requires your time and effort to generate where as passive income leaves you free and it keeps generating income on its own.
Hence work towards making your passive income larger than your active income.
To build your assets column, make this habit of moving 20% of your earned income into investments. There are various options to automate this so that the first pay out from your salary is towards your investments.
One such powerful option is called Systematic Investment Plan (SIP) of Mutual funds. Under this option, you can give instructions to your banker and Mutual fund to debit your account on a particular day every month. This ensures that 20% is paid first towards your investments.
You would have read in my last few articles, about the impact of delay in starting investments. Power of compounding works best only if you give it more & enough time to work.
This new year gift yourself a SIP (20% of your post tax income) and this SIP will give you back Financial Independence as return gift.
Hurry, before it gets too late !!!
If you need any guidance in how to start SIP, which funds to choose, please feel free to reach out to me at Shasirekha@gmail.com or at 9594079426.
Happy Investing !!