Recently, Steve got a substantial raise. His friends have recently convinced him of the importance of becoming an owner in the economy. Eager to take part in the potential for compounding growth, Steve finds himself facing a difficult question of what to do with the added income: How much should he invest?
Broadly speaking, a good rule of thumb lies in farmers’ wisdom: 1/3 to store (Save), 1/3 to plant (Invest), 1/3 to eat (Spend). These three areas fulfill these functions:
- Save: Most Americans have less than $700 in their emergency savings. By continuing to contribute to savings, Steve builds up his safety net in case of some sort of catastrophic event to his income. This should provide Steve with peace of mind currently, and in the future should such an event occur.
- Invest: Money that’s invested starts to work for Steve, even while he’s asleep. This portion of his wealth increases his wealth even more over time.
- Spend: Money exists to make our lives easier. Even as Steve puts his new income to work for him through investments and savings, it’s also important to use money to increase his standard of living. This gives him positive reinforcement for his successful habits. Whether it’s indulging himself in some way, or giving to a cause or a person he cares about, his money will fulfill its purpose of providing his life with enjoyment.