Sunday, October 14, 2012

Jim Rohn's 70%-30% Financial Independence Rule

The rule I am about to share with you absolutely works. On the surface, it may not seem obvious, especially if you have not used these principles in your own life.

I love my children. They teach me so much. Yesterday, when they left my car, I saw the big mess they left with all their belongings. I was speaking with my son and I realized that they did not see the mess. As parents, we have to teach them what to look for, how to see things and help them to find things they normally wouldn't notice. As we teach, we learn ourselves about leadership and patience. The natural cycle of life puts us into a leadership position.

It reminded me that as we grow in life, we may be presented with the same story, the same setting, yet have a different interpretation. Things we may have thought were boring as a child, bring so much joy as an adult. Things that we used to find funny, we can't see the humor in anymore.

Sometimes we can be quick to judge, quick to draw a conclusion. Truth has a way of bubbling up to the surface though, so the key is to continue to search, continue to explore. Wise people not only learn from their own experiences, but can also learn from other people's experiences.

EXPENSES

So, the rule, in a nutshell, has 4 parts. The first part states that one should only ever use 70% of their income on expenses. Most people probably think that this is not practical since they are already overextending themselves. However, most people probably can say that they used to be making 70% of what they are making now and they were covering their expenses. If you ever have trouble applying a financial rule, work hard towards increasing your income by becoming more valuable to the market place and when you do, apply the increase to the financial rule. As an example, if you are out of debt and you don't have a retirement account, maintain the same standard of living after your next pay increase and use the raise to fund your retirement account.

CHARITY

The next part of the rule states that you should donate 10% of your income towards charity. Whenever, I consider taking advice, I always ask myself, "What if I am wrong?" So imagine this isn't a good move and you spend 30 years giving to charity and you still end up broke. Well, the positive side is that you did something fulfilling with your life and helped to create a change in your community. From another perspective, changing your perception from one in which you ask, "What do I get from this?" to the alternate, "How can I give more?" allows you to become the type of person who is valuable to the market place, hence increasing your earning potential.

From yet another standpoint, giving and gratitude go hand in hand. By giving you allow yourself to feel gratitude which gives you a certain peace of mind since gratitude and negative thoughts like fear, doubt, worry cannot be felt simultaneously. Finally, by giving to charity, you have the opportunity to affect someone's life and possibly have a direct impact, which may later stimulate the economy.

ACTIVE VENTURE

Ten percent of your income should be used to fund an active venture. Everyone should own a small business. Small businesses give you huge tax advantages (will blog on this later). Small businesses stimulate the economy. This category can also include education and self-improvement. Classes and books may be expensive. It may also include actively loaning out money to a friend as startup funding or supporting a Kickstarter project. This might also include investing in real estate. All of these things can stimulate the local economy.

Most people don't realize they can stimulate the economy just by connecting two people who are looking for each other. They can talk and communicate, creating one more transaction, one more connection. They can speak to each other in the lines at the grocery store, coffee shops, online.

Some people live by the rule of "Eat, drink and be merry for tomorrow we die." I love this philosophy because to me it means that we should enjoy life and be grateful. However, I think that living happily may be completely different than partying as marketed in the media. Everyone has been given a specific set of talents. My hope is that people can use those talents to their full extent. A wasted talent may translate to a village of hungry people or a cousin out of a job.

PASSIVE VENTURE

Ten percent of your income should be used to generate passive income. In this category, you would include investing in global companies and the global economy. Picking big companies, no-load mutual funds, passive index funds, etc to stimulate growth in our country.

This may also include real estate if you have property management and are hands off in decision making.

Dedicated to Cheng Xu.

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3 comments:

  1. This article popped up at number 2 on google for searching the phrase "jim rohn 70 30 plan"!

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  2. Thank you so much for this. You put into words exactly what I was thinking about financial independence rule....

    financial independence & first impressions

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  3. Thanks, I had just listened to the rule on Audible and wasn't able to take notes. I appreciate your discussion on it.

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