Wealthy families often hire financial experts, tax lawyers, and investment advisors to help them manage their money. However, many of the systems they use can be replicated by anyone, regardless of their income level.
Whether you make $50,000 or $500,000 a year, a simple budgeting approach can put you on the path to financial freedom. In fact, following disciplined money management could help you avoid the paycheck-to-paycheck cycle that affects about a third of families earning more than $200,000 a year, according to PYMNTS. (1)
With this in mind, here is a closer look at the “15/65/20” system that can help you create lasting financial stability.
The 15/65/20 system is a modern version of the 50/30/20 rule, popularized by Senator Elizabeth Warren in All Your Worth: The Ultimate Lifetime Money Plan.
Essentially, the system divides your income into three categories (savings, essential expenses, and discretionary expenses) with clear limits for each. The key principle is to prioritize savings first.
As billionaire investor Warren Buffett advised: “Don’t save what’s left after spending, but spend what’s left after saving.” Financially successful people understand that the first step toward long-term security is to set aside money for savings and investments before making any other financial decisions.
Start by dedicating 15% of your monthly income to savings and investments. If you’re starting from scratch, this amount can help you build an emergency fund that covers several months of essential expenses. Once that cushion is in place, you can start investing for future growth.
Next, limit essential expenses to 65% of your income. This requires a conscious effort to live below your means.
According to the Bureau of Labor Statistics (BLS), the largest household expenses typically include housing, food, and transportation. (2) Reducing costs in these areas (by renting a smaller house, driving a more affordable car, or reducing grocery waste) can help you stay within this limit.
Finally, allocate the remaining 20% of your income to discretionary or “guilt-free” spending. This is your budget for personal enjoyment (shopping, dining out, streaming services, or hobbies) without derailing your financial goals.