Over the years, as I’ve helped people take control of their money and begin to live their dreams, I’ve discovered a simple, little-known rule that, when applied, creates financial success.
It’s easy to understand but can be difficult to use. If you do though, its power is transformative. I’ve seen people use it to pay off overwhelming debt, create financial ease and achieve financial independence.
This rule can be distilled into three guiding principles:
1) Take action to create change.
2) Simplicity and restraint create ease.
3) Consistent effort over time produces success.
I call it the Rule of 25. Here’s how you can apply it:
If your debt is overwhelming, I have discovered that it’s likely to equal 25 percent of one to two years of your household income. See for yourself. Add up your debt and divide it by your income.
Reduce your spending by 25 percent and use it to pay off your debt. You’ll need to be aggressive, but it will be worth it. The goal is to be debt-free in 12 to 18 months. Remember, as you reduce spending, what you cut doesn’t have to be gone forever, but it does have to be gone now so you can be debt-free.
Once you achieve freedom from debt, continue to live on three-quarters of your income. Invest the remaining 25 percent to achieve financial independence.
If you are like most people, housing is your largest expense. If you limit your rent or mortgage to 25 percent of your income, you’ll have money to save, spend and give. Yes, you may have to give up some things you’d like to have in a house or you may have to get a roommate, perhaps even two. However, you won’t be house-poor.
Lifestyle escalation can leave you feeling like you never make enough money. When you get a raise, add just 25 percent of it to your spending. Direct the remaining portion to your investment account. You won’t miss what you didn’t have, and your journey toward financial independence will accelerate over the years.
Saving 25 percent of your income for 25 years will leave you financially independent and free to work as you see fit. Consistent investing will have allowed you to dollar-cost-average – buying more stocks or mutual funds when the price is low and less when they are higher. Also, you’ll avoid buying when the market is high and panic selling when it goes down.
By applying the Rule of 25, you can take control of your money and achieve financial independence.
Durango resident and personal finance coach Matt Kelly owns Momentum: Personal Finance. www.personalfinancecoaching.com.
