Grant Cardone is a real estate investor, equity fund manager, bestselling author and founder of the 10X system to grow wealth. Cardone knows money — how to make it, and how to make it grow.
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So, what would this money expert say if he saw your budget? Here’s what you need to know.
Cardone’s 40/40/20 Rule
There are a lot of budgeting strategies around — the zero-based budget, the envelope system and the 50/30/20 rule, to name a few. Most of them focus on assigning a category to each expense and then trimming expenses to make them all fit.
Grant Cardone’s system is a little different. He espouses the 40/40/20 rule. At first glance, you might think he recommends spending 40% on necessities, using 40% for things you want but don’t need and saving 20% of your income. But this is nearly the opposite of what Cardone recommends.
Cardone’s theory is that you should earn as much as you can and save as much of that as you can, so that you can invest in assets that produce even more income. His recommendation is that you set aside 40% of your gross income for taxes, save 40%, and live off 20%. That’s right — you should spend only 20% of your gross income.
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Cardone also cautions against focusing too much on categorizing expenses and figuring out where each dollar is going to go. The more important focus should be on saving for future needs like education, home improvements and even vacations. And, of course, saving money for retirement should be paramount. This is where the guideline of saving 40% of your income comes in.
Cardone admits this will be difficult for nearly everyone. But he maintains that it can be done and that, in fact, it’s the single best way to force yourself to find creative ways to make more income. And it will lead you to generate even more income from your investments.
A Budget Is Just the First Step
Once you’ve created a budget Cardone would approve of, he will tell you that a budget alone is not enough. Once you have created your budget, you need a financial plan.
“A financial plan differs from a budget and is the basic entry point to creating wealth,” Cardone said in a blog post. “It serves as a road map for creating finances and correctly managing your income.”
Once you have your budget, you need to create solvency. Solvency means you are able to pay your debts, meet your long-term fixed expenses and grow over the long term. It’s usually used to refer to a company or other entity, but it applies to individuals as well.
“This is where most people fail with financial planning: They never create a plan that makes them solvent,” the money expert added.
The key to solvency, according to Cardone, is to determine exactly how you are going to create a surplus (or more than one) of money. If you’ve made a budget, you know how much you are going to spend, based on what you’ve spent in the past. A financial plan includes a blueprint for wealth creation. How are you going to generate enough money to fund the recommended 40% you’re putting in savings?
While saving 40% of gross income may not be attainable immediately, it certainly gives you something to aim for. And, if Cardone’s theory is correct, it could lead to income-generating investments that may lead to financial independence.
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This article originally appeared on GOBankingRates.com: Would Grant Cardone Approve of Your Budget?
