How the 1/4 Rule Gave Us a Realistic Approach to Financial Freedom
by Ande Frazier
July 12, 2019 .2 min read
We work really hard for our money, right?
But wouldn’t it be nice if our money started working hard for us?
The good news is that it’s totally possible. In fact, we’ve perfected a plan that covers all your worries and sets you up for the future all at once.
First, the best way to save is to pay yourself first.
However, we know that can be tough, so at least get started by going through your budget and find a number that you’re comfortable with after you’ve paid all of your expenses.
Now, we’re going to split that number into fourths and allocate them into different areas of our financial plan to create a balanced approach to taking control of our money. This will allow our money to work a little harder for us.
First, is Protection.
You’ve bought insurance before, right? Either on your home, or your car, medical, your favorite piece of jewelry or that treasured iPhone.
But have you insured your most valuable asset? That’s you and your ability to earn income. You know…so you can do all of that saving, spending, and investing we all love.
Put 1/4th of your money after expenses into some sort of protection for yourself. The right life insurance policy or disability insurance will help you in some of the vulnerable times in your life.
If you don’t have adequate protection, all the hard work you put into your financial plan might be for nothing if something unexpected happens that inhibits your ability to make money. Protect yourself and your future.
You can also use the cash value of your life insurance plan to help you in retirement, pay for your children’s college, and much more.
Second, is Savings.
This one, we all know. Save, save, save.
Make sure 1/4th of your money after expenses is going towards saving for those things that happen between now and retirement.
Building this foundation is critical because without it if you need money, you either will have to go into debt or stop those long term savings goals. Think of your savings as a cash reserve and a safety net.
In addition, this could also allow you to have the freedom to handle emergencies, opportunities, or start that side gig you’ve been thinking of.
Third, is Growth.
Again, 1/4th of your money after expenses should be going to grow your wealth. This is where you can build long-term wealth and income for your future. That could be retirement, college for the kiddos, or whatever you’re planning for.
Think of growth as your investments, whether that be stocks or bonds, real estate, or a business. These investments can help increase your rate of return but have associated risks so diversify, diversify, diversify.
Lastly, is Debt.
Put 1/4th of your money after expenses into paying off debt like your student loans, credit cards, and other non-deductible debt. This type of debt should be thought of strategically and minimized or eliminated over time.
Now, we realize this is a lot to take on. When thinking about your entire financial plan, an adviser can be really helpful. They understand the complexities and rules of the situations and can help you figure out what works best for you and your life.
Ande began her 20+ year career as an adviser and quickly realized that many people weren’t taking into account was how emotions play a huge factor in financial decision making. Leaving behind her practice to focus solely on educating both advisers and consumers alike, she became an expert in behavioral finance. Author, speaker, thought leader, and money educator, Ande is helping women to take control of their money.