This is a great question, and a question my mentor Jim Rohn posed and answered. He answered it so simply and intelligently, I wish to share his ideas and words with you. When asked how a kid should spend a dollar, most people will answer, “Well, he/she is just a kid and it’s just a dollar. Let him/her spend the whole dollar.” It is here that Mr. Rohn asks, “Well, when would you expect that to stop?” The idea is that if you let the kid spend the entire dollar, when would you begin to teach them not to spend the entire dollar? When they are a teenager, or in their twenties or thirties, or will the kid wake up one day spending 110% of that dollar and find themselves in debt?
Great question. When does it change? Mr. Rohn suggests you teach the kid immediately about his 70/30 plan. The 70/30 plan is quite simple. You let the kid spend .70 cents of the dollar. The remaining .30 cents is to be divided three ways: 10% for active capital, 10% for passive capital, and 10% for charity.
Let’s look at each and understand how Jim Rohn’s 70/30 plan can not only teach a kid, but also show a few adults some positive money habits.
70% For Living Expenses
70% is the limit that is to be placed on how much you can spend to live your life. This 70% is for your car, house, food, clothes, etc…. This is for your everyday living including your needs and your enjoyment. Limiting yourself to .70 cents of every dollar will force you to live within your means. This is the most you should ever spend for everyday living.
10% For Active Capital
Active capital is when you take a portion of your money and try to use it to actively make more money. Maybe you have a business idea you want to try. Maybe you want to buy 100 samples of a product and sell them for a profit. Maybe you want to start your own business. This is the money you will use to try to make more money. When you use money to make more money, you can’t help but pick up skills and learn.
10% For Passive Capital
Passive capital involves using your money to invest in something like buying a rental property, stocks, or bonds. It can also include savings accounts or certificates of deposit, though these generally have lower returns. The main value here is that you are loaning your money to another company to use, or using it in an investment where you expect to get a return back. This should involve less work on your side and thus considered passive capital.
10% For Charity
Yes, it is important to give back. As Jim Rohn said, “Giving starts the receiving process.” When you put money out there, it can’t help but return to you. It may sound weird, but it is true. Take 10% of your money and donate it to a local charity, a local church, or a family in need. You can never go wrong by providing for others. Not to mention, it’s chicken soup for the soul…that feeling you get for doing a good thing and helping others.
The Takeaway
The 70/30 plan is a simple plan. Teaching your kids this plan pretty much ensures that they will never find themselves in debt. As a matter of fact, even adults can take and implement this plan. However, this may be tougher to implement for adults as we tend to spend 110% of our dollar and living off of 70% would not be doable. That is okay. Instead of doing the 70/10/10/10 division with your money, use the 97/1/1/1. This plan is not really about the percentages. It is about the plan of where the money goes. As you become more stable, you can adjust the percentages.
If you find yourself making tons of money, you may find that you can’t spend 70% of your money just to live. That is fine too. Just take the 70% down for living and spread the percentage across the others. This can and will work for you. Just remember, it’s not about the amount, it’s about the plan.