The LA Kings holiday pack is back. The perfect gift for the hockey fan in your life. A three game pack starts at just $159 and includes a holiday blanket. Buy today and you'll receive an additional game for free. Don't miss out. Visit lakings.com/holiday today. Welcome to Radical Personal Finance, a show dedicated to providing you with the knowledge, skills, insight, and encouragement you need to live a rich and meaningful life now, while building a plan for financial freedom in 10 years or less.

On today's show, we're going to talk about the freedom of ratios, or the freedom of percentages, if you prefer. Let me give you a quick introductory comment so that you understand where this show is coming from. Over the past few shows, I've developed a few ideas. I've talked about the importance of living rich, focusing on living that rich life now, and not focusing excessively on frugality or extreme savings unless that's something that's getting you where you want to go.

I talked about my personal experience of how, once I understood the concept of extreme savings, it brought me to a place of wanting to save as much of my income as possible so that I could be financially independent. But then over time, realizing that I don't actually need to be financially independent to live the life of my dreams.

It's not necessary. And so for me, extreme savings is a valuable tool to know that it exists, but it's not the way that I want to live my life right now because I'm not trying to escape from anything. I wouldn't quit working. I wouldn't retire. And so why not?

Why should I not focus on living a richer life and on spending money on things that matter to me? Now, after developing that concept, I quickly followed it up with the seeming opposite concept, the freedom that comes with frugality. I talked about how saving money and frugality is important because it brings you a level of freedom, and it brings you a level of control over your life.

And so you've got to find the right balance between these two things, between the freedom of frugality and also living a rich life now, and the enjoyment that comes with consumption. So how do you find that appropriate balance? How do you balance these things in a correct way? Well, sometimes this is easy, and it's obvious that you should not have a sense of balance.

For example, let's say that you are, you know, a man or a woman who has decided, "I don't want to work at this job anymore. I want to leave this job." And you calculate that you want to leave this job and you want to move across the country or move around the world, and you calculate that you need a $5,000 budget to do that.

Well, in my opinion, there's no need for balance or, you know, trying to handle mutually opposing things of that situation. If you've decided, "I want to leave this job, and I want to move across the country, around the world, and get a better job," then your goal is as quickly as possible to save $5,000.

You do it now. And you live on beans and rice and stop spending any money because this is a goal that can be achieved quickly. Now, you could expand that if you are convinced that extreme savings is an appropriate path for you, and you just want to stop working as quickly as possible so you can be financially independent.

Then you might buckle down and live on nothing and execute that plan as quickly as possible. There are many people who have clearly defined goals. And when you have a clearly defined goal, especially a short or medium-term goal, it makes sense to move towards it in an extreme way.

That might be to start your own business. When I started Radical Personal Finance, I put my household on an extreme financial diet, on an extreme budget. Why? Well, because by lowering my expenses to nothing, I had the freedom to start a business that I thought would give me a really good lifestyle.

If I had just simply tried to continue consuming and consuming and consuming, it might have taken me a longer period of time to generate the amount of money that I needed in order to go full-time on Radical Personal Finance. And so it's wise in those situations to put yourself into an austere budget so that you can quickly achieve your goal.

Or perhaps you have some kind of event or adventure that is very clearly laid out. For example, I've over the years read many stories about travelers who decided they wanted to go and travel. Maybe I've read stories about people who decided, "You know what? We're going to drive the Pan-American Highway.

We're going to drive from Alaska to Argentina." And so they calculate the budget that they need. They figure we need a suitable vehicle, plus we need, say, $75,000 of budget over the course of two years. And we're going to plan to spend $60,000 total over the course of two years on our traveling expenses.

Then we need a $15,000 emergency fund and/or resettlement fund. So their target is very simple. We're going to save $75,000 and have a paid-for vehicle. Then we're going to drive from Argentina to Alaska. Well, that's a very simple thing. What do you do when you have a goal like that in a specific short-term timeline?

Well, you focus on it. And it's very gratifying to put yourself on an austere budget, beans and rice, and spend no money, and house-sit for people so you can spend nothing, and you live a super minimalistic lifestyle. You work all the time because you can quickly accomplish that goal.

And in one year, perhaps, of spending very little and saving everything, you can purchase your vehicle and have enough money to leave and go travel for two years, or purchase your sailboat and have enough money to start off on your trip across the world. So in those situations, an extreme plan where it's all in, that makes a lot of sense.

But those kinds of plans don't make a lot of sense to those of us who've already set up a lifestyle that we're somewhat comfortable with. Maybe you don't dream of driving from Alaska to Argentina, or at least not this year. Maybe you don't dream of sailing the world. Maybe you don't dream of retiring early.

But that doesn't mean you don't want to live well, and it doesn't mean you don't want to become wealthier. So what's the solution? What do you do? My answer is, you impose upon yourself ratios that make sense. You choose percentages, and you use those rules of percentages to help you to handle your money.

You get to choose the percentages, and I'm going to give you a number of ideas. But what I find helpful about ratios or percentages is simply that they help me to balance my emotionalism, and they help me to think about where I want to go and how I'm going to get there, and then to impose a logical path onto myself so that I know I'll get where I want to go in the fullness of time.

You can apply these ratios to your own life when it comes to how much money you save, how much money you spend, how much money you give, and they're all useful. I'm going to give you a large number of examples here of ratios that I think are worth your consideration.

Let's start with how much money you save. One of the simplest things that you can do in the beginning is simply choose a percentage of your income that you're going to save and choose a percentage of your income that you're going to spend. You can choose these ratios depending on how aggressive your goals are.

For an average person, a normal household, a normal household that chose intentionally to set aside 10% of their income up front to pay themselves first 10% of their income, that normal household can be massively improved by that simple decision. Pay yourself first is a tricky concept, but there's no question in my mind that it's an effective tool.

You decide, "I'm going to save first X percentage of my income," and traditional advice, right, going back for a very long period of time is something like 10%. If you will save and invest 10% of your income, you can become financially independent over the course of a reasonable time period during your lifetime.

So let's start with that. Let's say that you decide, "I'm going to save 10% of my income." You should also consider how much of your income you want to give to others. Having a giving budget, a specific budget that is allocated in advance that's done based upon percentages can give you a great deal of personal freedom because now you've chosen how much of your money you're going to give to others.

Let's say that you choose to give 10% of your income. Well, if you set that up in advance, and what I recommend, you set up a separate account, just like you would have a separate savings account for your financial freedom fund, and you set up a separate account for your giving account, and then just simply put 10% of your income into that, now you have a budget.

You know how much money you can afford to give away. You've already decided it in advance. And this can help you to do two things. It can help you to have enough money to give to people when you want to give to them, but it can also help you to know when to say no when you run out of money so that when your heart is being pulled in a certain direction and you feel like you want to give more money, but you look and realize, "I should not right now give more money," you know you've got a budget.

But you've chosen that budget based upon a ratio. There's an incredible freedom in that. You can choose a more aggressive ratio. You could say, "I want to save 20% of my income. I want to save 20% of my income, give 10% of my income, and spend 70% of my income." This is a great financial plan.

Anybody who continually over the course of their lifetime saves 20% of their income every year gains an incredible amount of financial freedom. And as their assets grow and they start to experience the joyful part of the compound interest curve, it just grows and grows and grows and grows. And that's a very reasonable number for you to set.

I don't think there's anybody that would look at you and say, "If you're spending 70% of your income, saving 20 and giving 10," there's nobody that would look at you and say that you're being irresponsible in any part of your life. That's a very balanced way to approach your income.

You're saving quite a lot of money. You're giving a healthy amount of money, and yet you still have the significant majority of your income to spend. That's profoundly helpful. Or you might choose a more aggressive path. Let's say that you live on the "spend half, save half" mantra. I think that's a reasonable number.

You might say, and then you can figure out how you put in your giving budget in there, maybe you say, "I'm going to give away 10% of my income. I'm going to save 40% of my income, and I'm going to spend 50% of my income." That's a reasonable thing to do.

That's a reasonable way to decide it. Whatever the percentages or the ratio is that you choose, once you've chosen it, you now have a sense of freedom because you've analyzed your situation, you've decided, "This is my goal," and now you can play with the other factors. For me, this is, I think, one of the most important things that I didn't understand earlier in my life.

I didn't understand that by choosing a fixed percentage, it would bring me the freedom to say, "Now, when I want to increase it, I don't have any conflict." Let's keep it simple. Let's say that you want to save 50% of your income and you want to spend 50% of your income.

Well, if you've chosen that and you want to spend more money, you know that you've chosen the rule for yourself is that you're going to save half, spend half, so now you go to the income side, which is where the freedom comes in. You figure out, "Well, if I want to double my expenses, but I also want to be rich, all I need to do is double my income.

If I can double my income, I can double my spending and double my saving," and that's where you should focus. It's usually the most productive thing. That's why I have this course on how to increase your income with a job and a career that you love. I think it's the most powerful, most important thing.

A good financial advisor should first and foremost be a career coach, an income coach, because that's the single most important driver of how wealthy you become. A good financial advisor should not be someone who sits around and optimizes $1,000 by figuring out to put your bonds in this account to minimize the taxation on the ordinary income and put your capital gains assets over here.

These things are piddly stuff, piddly. A good financial advisor should start by saying, "How are we going to double your income in the next three years?" Because if we can double your income in the next three years, everything in your financial plan can change, and you can live a bigger, better lifestyle with more consumption.

You can give more money away with more joy, and you can save a whole lot more money and get richer all the way across the board. When you realize that when I choose my percentage and stick to it, I can do both. I'm not stuck into either spending more or saving more.

I can do both, because I have a ratio, and the ratio gives me freedom. I encourage you, as a first part of your plan, to think about what percentage of your income it's right for you to spend and what percentage it's right for you to save. Choose that in the most advised, thoughtful way that you're capable of, and then commit to it, and then put in place the appropriate structure, maybe automatic transfers, maybe splitting your income into multiple accounts, assigning your direct deposit to multiple accounts, or whatever way you handle your finances, so that you can make sure that that takes place over time.

I think these are some ratios that are worthy of your consideration, a 10/10/80, a 10/20/70, or maybe a 10/40/50. These are some good ratios for you to consider. I think if you get to beyond 50% of your income, you want to make sure that you really have very compelling goals for fast financial independence, and you know why you're pursuing such an aggressive plan, or you make sure that you have a very high income.

I think that if you go beyond 50% savings, you better be clear as to why you're doing that. It's fine if you do, it's your money, you handle it any way that you want, but I think you want to be clear on exactly why you're doing that, because I fear that in this audience, there are more of us who are saving excessively, and would be really served by spending more, giving more, rather than just by hoarding more.

Now, I want to give you another idea of how to get to it. Let's say that you're currently saving nothing. Nothing. Well, here again, ratios are your friend. What do you do? Well, start to stick a wedge in your income. If I come along and I'm dealing with somebody who's spending everything, we start with a goal of, say, getting to 10% of their income of savings.

But I think the wedge principle is extremely valuable. This month, let's not save 10% of your income. This month, let's save 1% of your income. So if you're making $10,000 per month, well, take $10,000, 1% of that is $100. So this month, let's save $100. And then let's make a plan to increase it by 1% every month for the next 10 months until we get to 10%.

That's a really useful rule. This is the kind of rule that, in a normal situation, gives somebody the confidence that I can do it. I can just increase my savings by 1% every month until I get to my target goal of 10%. Very useful. Utilize that wedge principle. It's a rule that you impose upon yourself that has a really strong success chance.

Another rule that I consider very useful if you want to increase your income – excuse me, if you want to increase your savings. If you're somebody who's prone to spending too much or you're working with someone who's prone to spending too much, one of mine is when you make more money, save half, spend half.

Let's say your current income is $100,000 a year. Well, when you increase your income, maybe this year you get a 3% cost of living raise or a 5% bonus. Just simply commit to saving half and spending half. And then these ratios start to give you freedom. It's not all consumption.

It's not, "Hey, we got a $5,000 bonus. Let's all go to Disney World." But it's not all savings. For some people, savings are fun because they understand why they're saving. But for many people, savings is viewed as a form of torture. They want to consume because consumption is fun.

Well, the ratio gives you freedom. You can do both. Just save half, spend half. Whenever you make more money, save half, spend half. And if you do that, over a course of a period of years, those ratios will help somebody to get very quickly into a very strong financial position.

Where else can you use ratios to inform your decisions? Let's stick with these spending habits for a moment before we get to investments. Ratios can help you to make an intelligent decision on some of your consumption items. For example, how much of your money should you spend on housing?

Well, if you go to the internet and you pull up DuckDuckGo and ask it how much money you should spend on housing, you'll quickly find some answers. You'll find answers like 35% of your income should be spent on housing. 45% of your income should be spent on housing. These are not bad places to start.

45% is too high. But the point is, these are not bad places to start. These ratios basically show what is, and they're important to inform you. If somebody comes along to me and says that they're going to spend 60% of their income on housing expenses, I know that's too much house because the other parts of life are also important.

All of us have other expenses, and you don't want to be so house poor. That's why a lending company has a ratio. That's why if you go and you want to rent, you'll have a landlord that'll say you have to have three times the rent in terms of your monthly income because they know that if you only have two times the rent in your monthly income, you're not going to be able to pay the rent in the fullness of time.

So those are a good place to start. What I think is more important though is to understand where those things start and then ask yourself, if I do this, will it get me where I want to go? If I spend 35% of my income on housing, will that get me where I want to go?

When you care about wealth building, those ratios are probably not appropriate for you. You might need to spend 35% of your income on housing, but if you're spending 35% of your income on rent, it's probably going to be very difficult for you to save 50% of your income so that you can start your business, which is going to make you a multimillionaire.

And so you want to choose your own ratios, choose your own decisions. With regard to renting, there's not really a right or a wrong number. Lower is generally better, but you need to rent an appropriate lifestyle. Here I would ask you, what are your opportunities? I have consulted with people who were building a fast growing company, something like a tech specifically.

I'm thinking of one guy who was building a tech company. When I came along, he was spending all of his money on personal living expenses, and yet he had this fast growing tech company that had tremendous opportunity. When I came along, he was worried about credit card debt. My answer to him was, I said, "Don't worry about the credit card debt.

Pay the minimum payments. Pay what you need to pay in order to keep your household going. Your financial engine here is this fast growing company, and there's very good evidence that this should be a very productive investment for you." Lo and behold, came true. Five years later, he exited the company, multimillion dollar exit, and he was able to pay off all his debt.

He was able to become wealthy seemingly overnight, but it was actually that period of time of fighting through where he didn't have any money, was living on credit cards for a significant period of time. So you want to look and see what kind of opportunities do I have. But by having a personal rule, especially a personal rule that's oriented towards wealth, you'll make better decisions.

So let me give you a couple of ideas regarding housing and vehicles. One of the major differences between people who are wealthy and people who are ordinary not wealthy, especially in a country like the United States of America, has to do with what percentage of your income and/or what percentage of your wealth is invested in your personal home.

Wealthy people in the United States of America, and I think around the world, but wealthy people tend to have a very small percentage of their net worth invested in their home. The home may be very, very nice. You might live in a $20 million home, but there's a very good chance that the majority of people who live in a $20 million home have a $200 million net worth.

And so one of my goals is that I never want more than 10% of my wealth tied up in my personal home. That doesn't necessarily mean you can't live in a nice home. It does mean that if I'm going to live in a nice home, I'm going to make sure that nice home is mortgaged and I don't have all of my net worth in that home.

I think it's a major mistake for somebody with $150,000 saved to go and pay cash for a $150,000 home. Why? Well, first of all, the home is a consumption item. I don't mind it being classified on the balance sheet as an asset, but I think the classic Robert Kiyosaki, "A home is not an asset because it uses money," that's true.

If you care about building wealth, you should think of your home more as a liability than as an asset, because even if it is an asset, it's a very unproductive asset. It's something that you consume. That's just what it is. It's a consumption item. It's not something that's productive.

And so by qualifying it as unproductive, you want to minimize the amount of money that you spend on unproductive things and maximize the amount of money that you spend on productive things. And so if I'm talking to somebody who has $150,000 saved and they're thinking about buying a house, especially in the North American context where mortgage money flows down like rain, I would encourage them, never put more than, say, 10% of your net worth into that house.

Put down the small down payment and keep your wealth, keep your money invested as something that's going to go higher. Now, this would change if we moved into another culture where mortgage financing wasn't quite so free and available, but not change all that much, because the same lesson still stands.

I would rather rent in one of those places and keep my money invested in something that's going to be productive rather than in a personal consumption. And so I think that you should set a goal that in terms of my housing, I don't want more than 10%, maybe to a max of, say, 20% of my money invested in my house.

Beyond that, it's too much. It's too much risk. It's too much concentration. And it's not putting you on the path towards wealth. It's keeping you in the path of having a nice fancy house, which raises other areas of your expenses, but it's not putting you in a direction towards wealth.

If I lived in a house and I looked down at my budgets, my balance sheet, and I realized that 70% of my net worth is in the house, I would change that. And I'd recommend that you change that. And again, a target, say 10% to 20% of your net worth in the house.

Now, can you do that and still live in a nice house? Yes. If your income is high enough, and if the financing is available to you, if I lived in a house where mortgage financing was not cheap, sorry, excuse me, in a nation where mortgage financing was not cheap and not available, and I woke up and lived in a million dollar house and that was the only asset that I had, I would first analyze my business and say, "Does my business have the opportunity to grow massively?" If there is, maybe I would keep the house.

But if the business is not a hyper, hyper fast growing business, I think you're better off, sell the house, get something more modest and redeploy those assets into money, into assets that are going to make you money. Now, if you're in a mortgage environment, then refinance the house. Minimize the amount of money that's exposed to the personal housing expenses.

And if the ratios still work, where a modest percentage of your income is used to pay the mortgage payment, take that money and invest it in something that's more productive. I think it's one of the biggest mistakes that low income and middle income people make often in Western countries, is too much money spent on housing.

What else? Well, this is less important at the middle income ranges, but it's more important at the low income ranges. What percentage of your income is, or net worth, is being spent on vehicles? As with anything, some care is needed here. I believe there are good times and good reasons why it makes sense to have expensive vehicles.

I don't personally subscribe to the theory across the board that one should always drive the cheapest jalopy that they can find. I think that's a real mistake. I think this is something that has hurt me in my own personal life, that there are times because I was always committed to driving the most frugal car that I could find and the most intelligent kind of thoughtful decision.

I believe it hurt me. It hurt my income generating abilities. And there've been times in my life where I should have had a nicer car. However, the fact still remains that unless the car is making you money in a fairly direct manner, it's probably one of your fastest appreciating things that you own, your fastest appreciating assets.

So you want to minimize the amount of your net worth that is exposed to that if you care about being wealthy. The ratios that I like, for the hardcore of us, I think that you should spend 10% of your income on a car. Total, meaning that you take your income, take 10% of it, and that's the total value of the car.

So let's try this on for size. Let's say that you make $100,000 a year. I think you should spend about 10% of your income total on a car, about $10,000, if you care about wealth. Now, could that be higher? Yes. I think you could go up as high as 50%.

I think you'd go up to 50% of your income being used and still build wealth over time. But it should be across the border. It should be across all of your household's vehicles. If your household income is $10,000 and you have two cars worth $15,000 each and you have a $15,000 boat and $5,000 of ATVs, okay, I think you can still build enough wealth.

But it's slower than if you're at 10%. So I like the 10% number and I think that should be where we start. What a difference this makes when we tell people a ratio to start with. Think about your 16-year-old son or your 16-year-old daughter. If you train them, as I will mine, that if you're going to have a vehicle at all, which who knows, increasingly there are good reasons not to have a vehicle.

We'll see what the world looks like 10 years from now. But if you're going to have a private vehicle at all, that it should be worth no more than 10% of your annual income. You set them on the path for wealth in a profound way. If your child is making $30,000 per year, I think they should be driving a good quality, safe $3,000 car.

And they're going to be, have so much money available to invest that they can get wealthy very quickly. Maybe you double it up. Maybe 10% is too much for you. 20%? Great. You can get to a $6,000 car. But you're not going to get to a $30,000 car, at least not if they care about wealth.

And thus, you can help them to avoid one of the most expensive mistakes that we often make when we're young. So think about what percentage of income. Net worth-wise, let's say that you have a significant net worth. Well, here, I think you need to choose a percentage. And think about that percentage and how that makes sense in your overall scenario.

Maybe you say, "I'm not going to have more than 5% of my net worth that's used up and spent on vehicles." And you're going to have less than 5% of your net worth. So put some numbers to these things and see what feels right. Let's say someone has a million dollar net worth.

Is it fine for someone with a million dollar net worth to have $50,000 worth of vehicles, boats, RVs, etc.? I think that's fine. Is it fine for them to have $100,000? Of course, it's their money. They can do what they like. Maybe that's okay. But what it's often going to start to do is it's going to start to put them on the path of wanting to become wealthy.

And so if you want to become wealthy, you want to make sure that you have assets that are going up in value. Now, these percentages, I think, will change over time. Let me give you an example. Let's say that you have a person who is earning $100,000 a year from a job and has no savings.

Well, in that situation, I'd like them to drive a $10,000 car and save and invest money. But that person is in a very different situation than somebody who's generating $100,000 of income from their portfolio of investments, and those investments are increasing in value every year by 10% per year.

Well, now the person with $100,000 of portfolio income, next year is expected to be $110,000, and the next year expected to be $125,000, et cetera. They can now spend more money on their stuff, their consumption items, while still becoming wealthier. So I'm trying to give you ratios that I think make a lot of sense, but you should also analyze these ratios in the context of where you are in life.

Now, we've talked a lot about spending. We've talked about income. Let's talk about investments. Ratios will give you freedom with regard to your investments. Let me ask you a question. How much money from your investment portfolio should be invested into safe assets, conservative assets? How much money from your investment portfolio should be invested in speculative assets?

How much money in your investment portfolio should be exposed to any one particular investment? How much money in your investment portfolio should be invested in a certain asset class? Now, I don't know these numbers for you. I'm going to give you some ideas here. I don't know these numbers for you.

What I do know is that you should come up with a number that works for you. And if you're trying to figure out and you're trying to analyze your finances, you should try to figure out a number that makes sense to you. And I'm going to give you some ideas on how to get there.

As with all of the previous ratios, there's really no science to any of these numbers. We can run some math, but there are exceptions to all of them. But there are some ways that we can think it through in a somewhat disciplined way, a scientific way, and then I think get in the right range, the right ballpark.

Let's talk for a moment about, let's start with speculative assets rather than safe assets or conservative assets. What percentage of your portfolio should be invested into speculative assets? Well, I think it should be enough of a percentage where a big win would be meaningful, but not so much of a percentage that a big loss would wipe you out.

So let's play with some numbers. Let's assume that you have an investment portfolio of $1 million. And for the sake of analysis, let's say you're earning $100,000 per year, living on your income, and you've got a $1 million investment portfolio. Lots and lots of, this describes kind of the, probably the median listener of radical personal finance, median listener.

So you've got a million dollar portfolio. Let's play with some numbers. Let's say you put 1% of your portfolio into speculative assets. So 1% of $1 million would be $10,000. So you're going to put 10,000 into speculative gambles. First, before I go to 1%, why do I think you should have some money in a speculative portfolio?

Well, I think it helps to protect the bulk of your portfolio from big mistakes. I think there are a lot of people who don't have a gambling money account who can probably feel frustrated when they miss out on things they would have liked to have gambled on. If you have a speculative portion of your portfolio and you want to invest in Bitcoin, and you're not sure about the future of Bitcoin, you could just invest it in Bitcoin or Dogecoin or GameStop or whatever it is, whatever game you want to play.

Because you know, look, hey, I have this percentage of my portfolio over here. This is speculation. I want to gamble on this. And it allows you to feel like you're part of something. It allows you to educate yourself on something, but it doesn't put you in a position where you're risking too much.

So I think everybody needs a, it's almost a safety valve of sorts. You need a gambling portfolio so that you can just simply put money on, the guy at the barber shop says, "Hey, you should buy XYZ stock." You don't know anything about it. You should have a portfolio that you can pull out your phone and buy XYZ stock and just gamble on it just for fun.

Okay. Now let's talk about the right number associated with it. What I like to do is I like to say, what would be the downside and what would be the upside? So let's start with downside. If you have a million dollar portfolio and you put 1% of that into a gambling speculative portfolio, that'd be $10,000.

If you lost $10,000, would that hurt? I think the obvious answer is not much, right? If you have a million dollar portfolio, make it a hundred grand a year, it's just not going to hurt much. 10,000 bucks, no big deal if it's gone. All right. So we got, we covered the downside.

We know it's not too much to hurt, but here's the big question. Is it enough to matter? Well, let's run the numbers. Let's say that you have $10,000 and you invest it into something speculative that triples this year, right? You get a three X return this year and your $10,000 grows into $30,000.

Is that enough to matter? My guess would be probably not much, right? It's not going to, a person with a million dollars, so you've got a million, 30,000, okay, big deal, right? You're not going to change anything in your life in that situation. So 1% of your portfolio in a gambling speculative portfolio environment is probably, certainly not enough that it's going to hurt, but it's not enough that it's actually going to matter if you're successful.

So it's probably too small. Now you could go and let's say you did 20%. Well, 20% would be $200,000. If you lost $200,000 of your portfolio, would that be too much to lose? Could you afford to lose $200,000 of a million dollar portfolio? You judge for yourself. Some people, yeah, I could afford to lose it, right?

I'm making $100,000 a year. Some people, no, that's too much, right? But then look at it the other way. Let's say that you tripled $200,000. You had a three X return this year on your speculative investment and you turned $200,000 into $600,000. Is that enough to matter? My answer is absolutely.

Turning a million dollar portfolio into a million six because of a nice speculative investment, that's enough to matter. And so think through these numbers, right? Think through the downside and the upside and try to find a number that would make sense for you. My guess would be that for most people, it would probably be something like 5% or 10% of your portfolio.

Again, I can't say what yours is because the guy who has a million dollar portfolio and has no income coming in and is living on that million dollar portfolio is going to be very different in a different position from the guy that has a million dollar portfolio and is making a million dollars a year from his income, from his day job, right?

That guy making a million dollars a year could say to himself, "Hey, I've only got a million dollars. I got a hunch on this thing. I'll go ahead and put half my money into this deal. And if I can't do it, I'm not set behind much because I've got a big income." But you try to figure out a percentage that feels right for you.

Now, on the flip side, let's go to safe and conservative assets. What percentage of your portfolio or your net worth should be invested in safe and conservative assets? Well, you want to do basically the same analysis. You want to say, "I need a number that's meaningful. If I've got a million dollar portfolio and I've got $10,000 in safe money, is that really meaningful?

Is that going to do what I need? But I also need a number that's going to be significant enough to be meaningful, but not too much." Let's talk about life insurance, whole life insurance. My concern with whole life insurance as a primary tool for people is often that it's just too conservative.

It's going to underperform most other things. It's going to be stable, but it's just too conservative often. And so that's why I get really nervous when people put too much of their income into too safe stuff. You shouldn't have 30% of your income going into some safe conservative CD account or money market account or life insurance policy.

It's too much, too much, unless there's a specific goal for it. "I'm saving $200,000 so that I can build this million dollar, develop this million dollar real estate complex over here, and then I'll..." Okay, that's fine. But in terms of just general ratios, too much. But yet, people that don't have anything saved, too little.

So you got to find some kind of appropriate balance here where how much of my money do I need invested into something safe, something conservative. A ratio can work here. I always keep 10% of my money in something safe. Or a number that's informed by something else. I always keep three years worth of living expenses in an emergency fund.

These are fine. Now, there's other things that would involve other forms of asset allocation. A percentage gives you the ability to take a bet on something without being committed to its success. How much of your portfolio should be invested in gold? I'm uncomfortable if you get to that with anything except a percentage.

Maybe some people are okay with a number. Maybe you say, "I want to have 10 ounces of gold for every member of my family." I've talked about this, right? You're going to say, "I want to have 10 ounces of gold for every member of my family. I'm going to have 10 one-ounce coins sewn in a money belt for every member of my family.

So if we have to disappear in the middle of the night, and our family has to... We're being targeted or harassed for something, and we have got to set up shop in another country somewhere, at least we've got 10 ounces of gold to start with." Okay, that's fair, right?

That could be fine. A personal goal like that can make a lot of sense. I like these because they give me a round number, but I think a percentage makes a lot of sense. I'm going to have 5% of my net worth in gold. That would be reasonable. I don't think 50% of your net worth is reasonable, but 5% is reasonable.

And so you can, by choosing a percentage and going through that same analysis of, "This needs to be a big enough number to matter, but not so much that it's too big of a bet," you'll get to some of these numbers. You'll get to 5% of my portfolio should be invested in precious metals.

5% of my portfolio should be invested in cryptocurrency. 60% of my portfolio should be invested in large cap stocks, 20% in mid cap, etc. 60% should be invested in Western stocks, other international stocks, whatever the number is. That's all that asset allocation means. It's basically a way of deciding and saying, "We have this certain portfolio." Then we study and say, "How is this portfolio done in the past?" So therefore, it's probably going to do something like it in the future.

Of course, we don't know that for sure. So do we like these results in the future that we had in the past? And then by committing to it and committing to that overall asset allocation plan, you have the freedom that comes with knowing, "I've covered my bases and I'm not being stupid in any area." That's the power.

You've covered your bases and you're not being stupid. The guy who doesn't have any cryptocurrency at all is probably feeling like he missed out. That can be a dangerous emotion because the fear of missing out can now pile up on you and then you do something rash or foolhardy, something that's just not wise for your situation.

On the flip side, the guy that's got 100% of his money in cryptocurrency might not be sleeping very well at night. Maybe, maybe not. You just got to understand what are the risks here and what could I do. And the way to think about them is often in percentages.

Percentages allow you to make an informed decision. Percentages are not perfect. You need to always look at the situation and say, "What is someone doing?" For example, maybe you're a new college graduate. You've just graduated from college and you've just gotten your first job. You have no money saved, but you've just gotten your first job and you're making $60,000 a year.

Well, percentages would say that you're in a wildly dangerous position. Think about it. 100% of your income is being generated from one thing. Having a job is one of the riskiest things you could possibly do because if one income stream fails, you're sunk. You've got nothing. Now, that's true.

That's the thing that always drove me away from employment. It's just employment is too risky. To have all of your income come from one source where they can call you up on Friday afternoon and say, "Don't come in on Monday," that's a big risk, financially speaking. But of course, that's a risk that we take all the time.

Why? Well, because that's where you start a lot of times. If you need money, one of the best ways to get money is to go get a job. You say, "This gives me a job and at the end of the day, it's not so risky. So I'm going to go ahead and save some of my money.

I'll build up a little bit of freedom, a little bit of cushion, a little emergency fund, and I can go get another job if I need to." We can look at these same set of facts. But what we do is we look at the person making the $60,000 and we say, "Where is he going to go from here?

What's next?" I'm okay with taking big risks. I'm okay with that person making $60,000 saying, "I'm going to save 50% of my income for one year, then I'm going to leave this job and I'm going to put 100% of my income into the next business." I think it's fine to take big risks if you're informed about them.

But during those times in life where you don't have a clear plan, you don't have a clear business I'm going to start or a clear career move I'm going to make or a clear way to make a fortune, the ratios can help to keep you safe. The ratios can help to make sure that you're being responsible and the ratios can make sure that you're balancing that goal of consuming enough today, enjoying things today, while also saving for the future.

The ratios can help. So in closing, what I would suggest that you do is you think through the ratios that you believe make sense for you. I've tried to mention some that I think are useful and I'll give you a quick reprise of those things today. Here are the ratios that I would encourage my son or daughter to start with as a good starting point.

Number one, with regard to the income, I think it makes a lot of sense to save half, spend half. Save half, spend half. What I currently encourage my children to do is whenever they make money we split into thirds. We give a third, we invest a third and we spend a third.

That's fine, thirds work. I just do that because it makes the math easy with working with children. But for someone who's building an income and just starting, I think that giving away 10% of your money, saving 40% of your money and spending 50% I think is really a perfectly adequate scenario.

Now the reason I like people to start with that is because if you get people starting with that then they don't ever have the pain of cutting back. I used to when I was younger and more aggressive and more excited about extreme savings. I would encourage people, "Hey, get to half and half." I don't think it's necessary for most people.

I don't think it's necessary for the average person making $100,000 a year to only spend $50,000. What makes a lot of sense to me is to the average person, if you have the ability, if you're the average person is living in a high tax country, let's say in the United States making $100,000 you're probably paying about $30,000 to $35,000 a year of tax.

Well move to a no tax environment and then save the $30,000 to $35,000 a year of tax plus what you were doing before. You'll have in most high tax places, you'll have someone making $100,000. Again, they're going to be spending $30,000 to $35,000 a year on tax depending on how much of their wages are employment wages.

There's 15.3% in the United States of tax on $100,000 for Social Security and Medicare. Then depending on whether they're married, do they have children, what are the deductions that they have, are they enrolled in a retirement plan, et cetera. But you would often have another $7,500 a year of income tax on the first $100,000.

So you would get up to a total of something like, excuse me, you would often have about 15%. You would often get up to a total depending on state tax, et cetera, of say $30,000 of tax on $100,000 income. Well now if you take $100,000 and you turn it into $70,000 after tax and then you tell someone live on half your income, if you're going to calculate it based upon the net, now all of a sudden they're down to a $35,000 annual expense, which is probably a little bit heavy for most of us that make $100,000 a year.

So you can do something, my recommendation if someone's capable is move into a more tax efficient environment, move to a tax haven, cut your taxes on $100,000 to zero legally, and then save the tax money plus the other 15%, 20%, and just live on 50% or 60%. It's a better solution.

So forgive me for the tangent, just the point is if you can often get to things in a creative way. So save 20%, give 10%, live on 70. These are good ratios. At least 10% of money saved, my number is probably not higher than 50%. On investments and asset allocations, I think that something in the range of 10% of your assets invested in something safe, conservative, and stable feels pretty good to me.

Another 10% invested in something that's speculative, when you run those numbers, that often seems to be the kind of number that's pretty good. And then the 80% invested in something that is strong, aggressive, but not so totally speculative that you could lose it all. I'm not married to those numbers, but those are the kinds of ratios that I would encourage someone to think about.

On housing expenses, I say no more than 10% of your net worth into a personal house. If you can borrow the money and keep it down to say 25% to 30%, somewhere in that range of your income and cover the mortgage payment, it's probably reasonable. But no more than 10% of your net worth in a house.

And then when it comes to other consumption items, I say 10% to maybe 20%, certainly no higher than 50% of your income going into consumption items like cars, boats, that kind of stuff. Because those things just, you lose too much value. Do that until you're a multimillionaire. And then once you're a multimillionaire, think about your insurance funds.

If you put 10% of your money in cash, 10% of your money in gold, 10% of your money in cryptocurrency, then you keep 50% invested in your business or 50% invested in stocks. These are the kinds of ratios that give you comfort. Because you know you've got exposure to multiple things, but you're not overexposed in multiple areas.

In conclusion, think about the ratios that you believe in. As I've said, there's nothing scientific about these ratios. We can do an analysis of percentage of savings, right? I've talked about the math of early retirement, the famous charts that Jacob Lund Fisker outlined in his book, Early Retirement Extreme, that Mr.

Money Mustache profiled in his blog. I've got episodes of the show on how inspirational that was to me. If you haven't heard that, go all the way back to episode 163, published in March of 2015, called The Impact of Your Savings Rate on Your Time to Financial Independence. So that math works, but math can always be broken, right?

For example, the math behind that movement, that idea would say that if you save 10% of your income, you could take one year off every time you work nine years. If you go forward and you say save 10% of your income over your working career, it'll take you something like 45 years under standard kind of stock market expectations to become financially independent.

There's nothing wrong with that. But you could also save 0% of your income and be like my client who built a massive tech company and sold it out after about eight years of work and became a multi-multi-millionaire because he exited his tech company and saved 0% along the way, lived on credit cards the whole time until he got it profitable, had a few years of good income, and then sold and exited with a massive deal.

So there's always a way to break the math. But you want to understand the math before you start breaking the rules. The artists who break the rules effectively are those who understand the rule and then how breaking it can bring an impact. If I use poor language, let's say I come out here and I start using a word like ain't or a word like funnest or something like these.

I can use those words as a skilled public speaker. I can come out and I can use these words, these mistakes in the English language, and I can break the rules and it works for impact. I might say something like well that ain't gonna work for you. And I have an emphasis that comes from breaking the rules of the English language, breaking the rules of speaking with proper English grammar.

But I can only do that effectively because I understand the rule and then I break the rule when it matters. There's a big difference between me coming out, between my coming out, here we go, there's a big difference between my coming out and speaking eloquently and effectively on a topic and then for emphasis saying well that ain't gonna work out so well for you, is it?

Versus my coming out and from the very beginning of the show to the end speaking like an uneducated hick. Same thing comes to place with these ratios. There's a big difference between a financial advisor like me saying to somebody right now I don't think you should pay off your credit card debt because in my estimation you have a working business here that's growing and you're using the credit card debt to fund your lifestyle and to cover enough living expenses so that you can get this business growing and we're gonna break these rules about spending less and spending credit card debt and piling up debt, blah blah blah blah blah, etc.

temporarily to see if this works. That was the advice that I gave. My client was spending a lot of money, going out to eat a lot, living not an extravagant but living a non-frugal lifestyle. Why? Well he had a bunch of children and he was trying to keep his family going while he got this business going and by spending money on the home front it freed him up enough to get the business going and so the right plan at that point was not to come in and say what you need to do is you need to put your household on a budget and you need to tell your wife while she's taking care of all these children you need to tell your wife honey you got to spend a maximum of $450 at the grocery store.

That would have been a suicide right and it would have broken his whole plan of building the business but a few years of just limping along and then exiting the business it worked right so you can break the rules on occasion if you know them but you can't make a habit of breaking the rules and that's where the ratios come in.

Could you convince me if you were a sharp young lawyer you've just graduated from the best law school in the land you've gotten a job could or you're getting a job could you convince me that you need to come in and lease a brand new very nice BMW for $2,000 a month?

Answer is yes. I could absolutely be convinced of that. Signaling matters and so if you're going to signal yourself as the hot shot who is extremely successful I think that absolutely can work but we're not going to apply the same thinking as a general rule to the guy that just got a store manager job.

It's suicide for the guy who just got a job as a store manager to go out and have the same $2,000 a month lease payment. Hope you understand. Hope that's a helpful addendum here at the end. You need to understand what the rules are in order to understand when it's okay for you to break them.

You can't just go out and break the financial rules willy-nilly and expect it to work out well for you. Thank you for listening to my show today. I hope this is useful to you. I would remind you that I sell a course called the Radical Personal Finance Guide to Career and Income Planning and the single most effective thing that you can do to build your financial life in a way that allows you to properly balance building wealth and also enjoying consumption is to increase your income.

I spent far too many years of my life focusing on frugality. That was a mistake. If I had spent that same time focusing on building my income, I would have had all the things that I was trying to get with frugality, namely higher savings, higher investments, but a whole lot more of the things that weren't available with frugality, more vivid high-class experiences, richer memories, etc.

if I had focused earlier on building my income. So don't make my mistake. Don't repeat my mistake. From the very beginning, you should have a plan to build your income. So if you don't have one of those plans, go to RadicalPersonalFinance.com/store and sign up for my Radical Personal Finance Guide to Career and Income Planning.

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