With 2 weeks into the new year, setting the pace for the rest of the year is the main objective for January. Developing a personal budget that you are able to follow is the way to start.
The Broke Investor’s 50/25/20/5 budget guide may be the perfect budget for you. I will also go over 2 alternatives to The Broke Investor’s 50/25/20/5 budget guide, to show you what’s possible when coming up with a personal budget.
50/25 Liability Budget Portion
Simply put, the first 2 items (50/25) fall under the Liability category. For the 50% portion, this will be your essential expenses like electricity, water, phone, internet, gas, etc. It will also include your minimum debt payments along with Your Habit(s) Spending.
If you are wondering what habits I am talking about, this will be things like eating out, purchasing cigars/beer, that weird fetish you have, etc… Basically, anything that you have a HUGE AMOUNT of control over.
The Chop Block
The 25% portion will be “The Chop Block”. This is specifically geared towards chopping away debt. The Chop Block is NOT meant to pay for the Minimum amount for your debts, that is covered in the 50% portion.
The Chop Block, if used properly, will allow you to save $ by avoiding accumulated interest on your past charges. In reality, that $2 burger could end up costing you $20 or more if you are using your credit cards for your Habit(s) Spending and only paying the minimum on your credit cards each month.
20/5 Financial Independence Budget Portion
The next 2 items (20/5) fall under the Financial Independence category. The 20% portion is for your Active/Passive Capital. If you are unfamiliar with what active and passive capital is, I will attempt to make it is simple as possible.
Active capital is strictly meant to be used for enterprise pursuits. An enterprise pursuit is anything that you are actively investing money into in order for you to make a profit.
Broke Tip: Wages make you a living, profits make you a fortune.
For example, let’s say you wanted to create a kayak rental business. You would first have to find out what type of business structure you want to put in place. In addition, you will have to get all the necessary permits.
All of this will cost money to pursue. Permits cost money, filing with the State cost money, etc. This is where your active capital plays a role. If you steadily put money aside for your business ventures, sooner than later, you will have enough to cover the cost to startup. Beats going further into debt.
Passive capital is simple. This is capital that you invest with someone and they in turn will make a profit with the passive capital you provided. Retirement accounts are great examples where you can put your passive capital.
An alternative to retirement accounts will be investing in a company you do not have an active role in. Then if the business is a success, you can end up getting dividends for the amount you invested or get the money you put in, back, with an additional amount for taking the risk.
The last portion, 5%, is for generous contributions. There is no better way that helps build character than making generous contributions. Generous contributions are amounts that are given to a worthy cause.
Of course, worthy causes can be different for each of us, but an example would be contributing to your temple of worship or contributing to a cancer awareness program.
So, The Broke Investor’s 50/25/20/5 Budget Guide:
50%: Essentials + Minimum Debt Payments + Habit(s)
25%: “The Chop Block” (Dedicated to sewing The Broke Investor’s Pockets)
20%: Active/Passive Capital (Enterprise/Retirement)
5%: Generous Contributions (No better way to build character)
The Broke Investor’s 50/25/20/5 Budget Guide was inspired by:
Jim Rohn‘s Budget Philosophy:
Never spend MORE THAN 70 cents.
Other 30 cents: 10 cents for Charity, 10 cents for Active Capital, 10 cents for Passive Capital
Fidelity‘s 50/15/5 guide:
50% Essential Expenses
15% Retirement Savings
5% Short-Term Savings
other 30%: up to you
Keep growing, keep investing. Even if you are, The Broke Investor.