Each time you get a check, there may be a temptation to spend one of it on things you don’t need. While it can be beneficial to buy discretionary from time to time, doing it too much can hinder your long-term savings goals.
That’s why basketball legend Shaquille O’Neal uses the 75/25 money rule that allows him to spend some of his earnings while saving and investing most of it, according to an interview with. Wall Street Journal in 2019. Here’s how the strategy works, and how you can apply the basketball star method to your own money.
What is Shaq’s 75/25 rule?
Shaq’s 75/25 rule follows a simple premise. Save and invest 75% of what you earn and live on the remaining 25%.
To be honest, that’s not a budget that will work for everyone. But the point of these types of rules is to set aside money that you can spend without guilt on selected items. Then, a portion of your paycheck goes toward living expenses and investments.
Prioritize an emergency fund
Savings helps ensure that you have some money left over in case of a financial emergency. Financial advisors generally recommend that you try to save enough money to cover your essential living expenses for three to six months, and keep it somewhere within reach.
Once you’ve built an emergency fund and saved enough money for short-term expenses and goals, you can start investing for medium- and long-term goals. While an emergency fund can help you pay for immediate expenses, it’s generally not a good idea to invest it in vehicles that can generate higher returns over the long term, such as stocks.
One day, when you retire, you won’t have a continuous payment. Although Social Security can help, it is often not enough money for most people to maintain their lifestyle. An investment portfolio can bridge the gap between Social Security income and monthly expenses while reducing your financial stress over time.
How to change the 75/25 rule for a regular check
Most people cannot save 75% of their income. However, you can assess your financial situation and build your savings rate over time. If you don’t know how much you save per paycheck, finding this number and reviewing your expenses can make it much easier to save more money.
You can adjust the numbers based on how close you are to your financial goals, some people opt for the general 50/30/20 budgeting rule. That rule includes putting 50% of your income toward necessities, 30% toward wants, and 20% toward investments and debt payments.
But every little savings can help. If you’re saving 10% of your salary right now, aim for at least an 11% savings rate next year. It’s easy to figure out this number if you start with a low savings rate. Automatic transfers from your checking account to your savings and brokerage accounts ensure that money disappears from your main account before you have a chance to use it.
Depositing emergency funds into a high-yield savings account allows you to earn interest on your money as it sits in the account. Some savings accounts offer 3% to 4% annual percentage yields (APYs), but these rates fluctuate over time.
