Most people aren’t given a lot of money, so they have to earn it to get rich. The surest way to get rich is to invest spare money.
Use the 10% rule for investing spare money (1). According to the 10% rule, your spare money is 10% of any money that you receive. How much is 10%? It is the amount you receive divided by 10. In other words, you should try to invest $1 from every $10 that you receive. Use the remaining $9 to pay for other things.
Hint: Spare money is an expense item in your budget. It’s the amount of money that you plan to spend on investments. Protect your spare money by putting it in the bank and by planning a budget.
Put your spare money into a U.S. bank account where nobody can steal it and where you can automatically earn some extra money called interest. If the bank loses your money, the U.S. Government will repay you. Be sure to keep your bank statements as proof that you own the money. It’s a good idea not to tell people how much you have in the bank account.
Hint: For information about starting a bank account, click on this link to Opening a Bank Account.
The budget is your plan for spending money during the next 3, 6, or 12 months. When you plan a budget correctly, the total income and expenses should add up to zero.
Income is the money that you expect to receive. Some typical sources of income for young people are a job, an allowance, and gifts of money. Try not to borrow money!
Expenses are ways of spending money. Some important ways of spending money are for groceries, housing, transportation, healthcare, clothing, school supplies, lessons, taxes, fun, helping others, and investing spare money. Try not to use a credit card!
Budget: Want to plan a budget for next year? If you don’t know what your income will be, assume that it will be $100. Make a list of your important expenses. If you think that the 10% rule for investing spare money is an important expense, then 10% of your $100 income is $10. Do you owe money to anybody? Then plan to pay them. Do you pay taxes? Then plan to pay taxes. What are the rest of your important expenses? The budget isn’t ready to use until the total income and expenses add up to zero.
Here’s a sample budget for a 6th grade student living at home with parents who pay for groceries, housing, taxes, and healthcare. In the following table, all of the expenses are ($100) and they will use all of the $100 income. Therefore, the expenses and income add up to $0.
|Student’s Income||Student’s Expenses|
|Allowance||$50||Invest spare money||($10)|
So how does your budget protect spare money? Your budget is a plan to buy items that you need and can afford without carelessly borrowing money. Credit cards are the easiest way to borrow money carelessly, so be very careful. Loans are another way of borrowing money. The person giving you money through a credit card, or by making a loan, is called the “creditor” or “lender”. When you borrow money, the creditor has a powerful claim on your future income until you repay the loan. Creditors usually require you to repay more money than you borrowed!
Investing spare money
When you have enough money in the bank, withdraw some of it to open a brokerage account. Then make an investment in your brokerage account. Ask the manager of your brokerage account to make an automatic reinvestment of your dividends. Leave your money in the investment for a very long time so that it can grow in value through the miracle of compounding returns.
Hint: For information about starting a brokerage account, click on this link to Hey Kids and go to the APPENDIX at the bottom of the page.
The surest way to get rich is to invest spare money. Use the 10% rule for investing spare money. A bank account and a personal budget will help protect your spare money. When you have enough money in the bank, start investing it in a brokerage account. Don’t use the money in your brokerage account to buy a house or go to college. You can budget for a house or college by getting a good job, getting a scholarship, applying for financial aid in college, or borrowing money in a responsible way.
Copyright © 2014 Douglas R. Knight
1. George S. Clason. The Richest Man in Babylon. Penguin Books, New York © 1955, .., 1926.
2. Better Money Habits™, www.bettermoneyhabits.com, 2014 Bank of America Corporation. All rights reserved.