How To Manage Your Income Effectively

Probably one of the most important “assets” of our lives is money. You just can’t live without it. It is one of the biggest concerns of every individual. Most have to deal with the lack of it, but the fact is that, its absence, is most times caused by the lack of knowledge, or education regarding its use, that leads to poor financial decisions.

Anyways, I don’t want to focus on the mistakes/problems that may arise from bad money management, instead, I want to focus on a simple strategy that allows you to balance and distribute. This formula has two fundamentals, firstly, the power of compounding (investing) that allows to increase the value of the currently invested money, secondly, it is also important to have a secure margin of income to deal with the eventual misfortunes of life.

Moreover, I don’t want to focus on the technicality of the problem. I’m not providing a magic formula about an accurate prospect regarding an extremely undervalued asset that will sky-rocket in the next couple of years. It’s not about that. Here, I’m providing a simplistic formula that will guide your money allocation.

Consequently, there is one question that you need to consider before reading and embracing this formula: “How should you allocate your money effectively so that you are, not only protected me from future threats, but also, able to increase the value of investments.” Finally, you have to consider five different sections, in which, your money is used for: necessities, emergency, investment, learning and fun.

“The single most powerful asset we all have is our mind. If it is trained well, it can create enormous wealth in what seems to be an instant.” – Robert T. Kiyosaki
#1. Necessities (60%)

There’s no way around these expenses. These are certain, and you can’t run away from them. Everyone has to pay for their rent, water, food, clothes, etc. (basic necessities). So, it is recommended to spend a maximum of 60% of your income in this section. Now, it is important to consider that it is being talked about necessities. Your expenses with the acquisition of some Gucci sleepers or with a pair of Yeezys CAN NOT be included in this section. This one is only for necessities!

#2. Emergency (10%)

This is the money you don’t touch. When you receive it, it must go directly to somewhere dark and deep where you cannot feel minimally influenced to use it. As the name of this section suggests, this is your emergency fund, or, if you prefer, your savings. Now, these aren’t just your regular savings. You CAN NOT use this money to go on vacation or to buy the computer you really want. This money is kept for an eventual emergency, such as, an health problem or a damaged vehicle.

You have to be extremely cautious with this so called “savings”, because most people ignore this formula and actually use this money to finance some of their fun activities, as it will mentioned in the future. It is recommended to spend approximately 10% of your income in this section.

#3. Investment (10%)

Also known as passive income. I won’t give you an exact strategy for investing. That is not the purpose of this post. However, investing makes a huge difference to your financial independence by allowing money to work for you, instead of the other way around. Now, it is up to you. What do you prefer? Small business investments, stocks or bonds? It doesn’t matter. Investment have to be done. You HAVE to invest if you intend to achieve your financial freedom. You should spend 10% of your income in this section.

#4. Learning (10%)

The most important asset that you can have in your entire life, that will lead to, not only, financial success, but also, spiritual development, it is not money. It is yourself, your mind, and your desire to learn. The regular bullshit that learning only happens in school does not exists anymore. Are you working in a crappy job, stuck and receiving charity money? Invest in a skill, go to seminars, do online courses, read books (there are plenty of free opportunities online, you have no excuse). Learn until your knowledge is developed enough to guaranty you a better job or better opportunities.

You might feel extremely undervalued by your employer, but if you invest in yourself, all the hard-work will payoff, and eventually, you will be irreplaceable, receive more and have more financial stability. So, here is where it is recommended to spend about of 10% of your income.

#5. Fun (10%)

Assuming that after all the hard-work you have put in, you wouldn’t receive any benefit, it is just naive. We all have different needs. You might like going to the cinema with your girlfriend, or eating at a fancy restaurant, or even, damn, you might want to buy those Gucci sleepers anyways! Here is where your 10% will be invested, to finance your fun activities. Now, notice this, you have to be disciplined. Don’t go over the 10% line!

Finally, there something really important that you should consider. I can see you already putting your hands in your face and wondering: “There’s no way I can manage my money, I can’t spend 10% of my income on learning, or investing, or anything, I’m doomed!

That’s why the mentioned tips are so helpful. There are just the blueprint, the optimal goal. You might not have enough income to invest 10%, since your necessities are way to high. So, do the following: If you have to spend 95% of your income on necessities, spend around 1%, on the rest of the mentioned sections, and improve those percentages over time. The most important thing is to build the habit of managing your money properly. Don’t forget that!

Also, this post was greatly inspired by Dan Lok‘s teachings (video). He’s really a brilliant man and I honestly recommend you to go follow his work, here. Thank you so much for reading, it means the world to me. See you soon boy!

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7 thoughts on “How To Manage Your Income Effectively

  1. Great advice. I would also allocate funds to pay down any short or long term debt. Concentrate on paying down any credit card debt quickly as those interest rates could be 18% or more. The thing is not to use them unless absolutely necessary, but then pay the bill completely when due.

    Liked by 1 person

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