What did Jim suggest?
If you apply this framework, or something very similar, you will end up rich. With your after tax income, he suggests the following:
live within your means (70%)
take a risk (10% active capital)
take your medicine (10% passive capital) and
exert benevolence (10% charity)
Jim who?
Don’t know who Jim is? Please take the time to look him up. Unfortunately, he passed away in 2009 and left a great philosophical footprint on economics and personal development on the world.
He talks about his mentor, Mr Earl Shoaff asking him to come up with his own formula on how to allocate your income. He came up with the following:
The 70/30 rule, as mentioned above.
Learn to live off 70% of your income, no matter what the income
The plan for the rest:
10% to invest in an enterprise, to make a profit (active capital)
10% to invest in an income paying source, (passive capital)
10% to give to charity
If you have a look on youtube you can find the audio recording, most probably recorded from the 1990’s, I’m not sure of the date. It is around 10 minutes long. As usual, it is highly influential and the approach still holds true today.
It’s too much, what’s the alternative
He also suggests that if you are in such bad shape and you can’t start on 70/10/10/10, start with 97/1/1/1 and go from there. I think that’s a sensible approach.
Why even do this! Why I think it works
It trains the ‘pay yourself first’ mentality.
Creates a goal, a plan and subsequent action. Nothing will happen without something to go for. You can’t think your way into setting money aside, you need to have a concrete plan
It’s a promise to your future self that if you sacrifice now, you will have more in the future. Particularly the ‘70%’. The 70% might not be much this year, but what if it’s 74% compared to the previous year? Wait a few more years and then what? That’s the idea
70% rule
Pretty self-explanatory. It’s what you use to live off. It’s good because I think for most people it avoids the dreaded budget and it involves less micromanagement.
10% rule – Active capital
Active capital - Allows activity. My assumption here is that Jim acknowledges that most people cannot sit still with the buy and hold approach and need activity and this portion alleviates that, alleviates the need to take a risk and get a higher return. The desire most of us have. Whether it be a buy and sell of a house or a stock as an example and recognise a profit. This is the capital generator and higher risk.
10% rule – Passive capital
Passive capital - A hedge. If your enterprising activity doesn’t work, this is your fall back. This is the income generator and lower risk. It also helps with the 70% the following year if the money gets re-invested each year to produce more income using compound interest.
10 rule% – Charity
Charity, or giving, starts the receiving process. In order to receive, you must first give. It’s a fundamental rule of the universe. Don’t just give it away to any charity. Do your research, find out where the money goes.
Let me know what you think of this idea Jim put out there. My thoughts are that there needs to be a portion of income that goes back into education each year, whether that be to help grow your income in total or help make better choices with the active and passive capital.
If you are after some further reading on how much to save, try this article below
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