The 50% Rule

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Many years ago, I made a very important decision when it came to money. That was to save and invest at least 20% of my income. What was my thought process? Income replacement. In other words, live on only 80% of my means, and save and invest the 20% I don't need in order to eventually have enough in savings earning enough in dividends and interest to cover all of my expenses. Thus, if I do it right, I can effectively replace my paycheck. And if I can replace my paycheck? I no longer need one. If I do decide to work? It's gravy. It's the icing on the cake. It's more money to generate more income. It's effectively a built in pay raise. But also, very early on, I developed another important rule to ensure that the principal is sustainable, provides cover, and is never actually needed. It's a planned, built in cushion. You have heard me say this phrase many times here before. Spend the proceeds. Not the principal. What it means is, only ever spend the money your money makes when you have managed to replace your income. Never spend the money that makes your money. But I went one step further, because I am an "extreme" personality. Thus, the 50% rule was created. That is, you are only allowed to ever take 50% of the dividends and interest. What it did was created a double down effect. If I made $1000 in dividends, it only counted toward $500 of income replacement. If I needed to replace an income of $80,000, I needed to generate $160,000 in income in order to rely on it, as well as have the ability to reinvest the other $80,000 I did not need in order to generate another $4,800 a year to add to my income to account for inflation and other factors. Granted, it took years to do this, and it took commitment. But the principles remain the same. Making money is not about how much you earn. It is about how much you keep. More importantly, it's about how much you can generate on the money you keep. Doing things this way, not once have I ever felt the need to sacrifice. I was always allowed to spend the proceeds at the 50% level. If I wanted to do something, I did it from the money my money generated. The other 50% was still always working toward my ultimate goal. If I had $100,000 in the "bank," at a conservative level it was generating $6,000 a year. With the 50% rule if I wanted to blow $3,000, that was okay. I still had the other $3,000 a year I wasn't using making me another $180 to give me $3,060 the next year to blow. As I have said time and again, money and creating wealth is about a mindset. If all you ever think about when your paycheck comes in is paying the bills and getting by? You will forever need to work more to get more. If you keep a portion of what you earn and let it work for you? Eventually you realize the paycheck is no longer necessary. Your money can do the work for you, and when that happens? You can reclaim your life and decide for yourself what you want to do, rather than what you are forced to do. This is just another lesson from Porwest to think about your money not as a means to an end, but a means to a future. Is it easy? No. Does it take time? Yes. Are you going to have setbacks or hiccups along the way? Most certainly. But when you start to think about money in terms of what it can really do for you, it changes the game and sets you on a path you'd never believed was possible when all you did was punch a time clock and eagerly anticipate that paycheck just to be broke 5 days after it hit your bank account.