Today I’m going to give you details on Van Cleve Rule Number Two that I wrote about in my previous post. The rule is this: Save 15% of all of your income, no matter what the source, and live off the remaining 85%.
Before we start, I’ll mention Van Cleve Rule Number One which is: Your income never exceeds your ability to spend it.
This leads to rule number two because most people reflexively think, “All I need to do is earn more money and that’ll solve all my problems.” This is simply not true. The more you earn money, the more you will spend, even if you don’t realize it.
So how do you implement Van Cleve Rule Number Two? Any time you receive income – whether it be a check or cash – calculate 15% of that. Transfer that 15% to a savings account right away.
Which bank should you use for your savings account? I prefer having an online bank account like Ally – they pay a higher rate, their website is very user-friendly, and their rates are much better than a traditional brick and mortar bank.
Make this a rule, not a plan.
My number one tip for making this work – it needs to be a RULE,, not a PLAN. You need to make the transfer right away, as soon as you’re depositing your check or getting cash.
What if I already set aside money for a 401(k)?
On a side note, if you have a 401(k) and you’re already putting 5% of your gross pay into that, then you can just add 10% of your income into your savings account, so that you have a total of 15% going into savings (5% to 401(k) + 10% to savings).
How do I live off of just 85% of my income?
It may take some time to adjust to living off of only 85% of your income. You can do it in one of two ways (or both).
Cutting Expenses
Method #1 is to cut your expenses. You’ll need to divide your expenses up into two categories: essentials and discretionary. Essentials are things like food, utilities, transportation, shelter, health care, and insurance. These things are your number one priority when it comes to allocating your money. When you are able to pay these essential bills each month, you are considered solvent.
Discretionary expenses are all of the other things that will not affect your health and your life – things like cable TV, entertainment, and vacations. If you need to make cuts, these are the first things that you’ll want to consider.
Attrition
Method #2 for adjusting to live off of 85% is attrition. For example, if you get a raise, then put 100% of that raise into your savings. You won’t miss it, because you weren’t getting it before. This can help increase the amount that you are adding to savings, until you reach that 15%.
In Conclusion…
I know all this sounds obvious, but the cause of most people’s problems with money boils down to this – confusing the essential things with the secondary. So again, your first goal is to be solvent, which is the ability to pay all your essential bills without going into debt or tapping into your savings. The good news is you get to spend the other 85% however you want.
Stay tuned for future posts where I’ll talk about what to do with that 15% as you’re accumulating it, getting out of debt, and why I think budgets are stupid.
For even more on these topics, order my book Understanding Money and subscribe to my YouTube Channel.