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The four numbers

According to Sethi, financially successful individuals and families only need to track four key aspects of their personal finances: fixed costs, long-term investments, savings and guilt-free spending.

“You don’t need to track [financial] ratios, or the price of ketchup — ever,” he says. “You track these four numbers, you can spend less than one hour per month on your finances.”

Fixed costs is the first and most important metric. This includes essential items that can’t be avoided and recur regularly, such as rent, mortgage payments, property taxes, car payments, utilities and essential food. According to Sethi, fixed costs should ideally be no more than 50% to 60% of your family’s after-tax income. He also recommends adding a small margin of safety for unexpected or hidden costs, such as car repairs and home maintenance.

With the bulk of your monthly expenses controlled, Sethi says you can dedicate 10% to long-term investments and 5% to 10% for savings that include an emergency fund and near-term ambitions such as home down payments and having kids.

If you ask Sethi, long-term investments are the essential ingredient for success. “That money compounds. It will grow like you wouldn’t believe,” he says. “There will be a point where you will make more from your investments than from your income.”

With 80% of your family’s after-tax income deployed in these three segments, the last segment is for guilt-free spending. Depending on your budget, this could be between 20% to 35% of your monthly take-home pay.

Sethis’s strategy can be summed up as simple budgeting and disciplined investing. On paper, this looks like a robust roadmap to riches, but the economic struggles faced by ordinary families in 2024 could put some of these simple targets beyond reach.

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Cost dilemma

Real median household income was $74,580 in 2022, according to the latest Census data. That’s 2.3% lower than the previous year, while the cost of most essentials has only been moving higher.

Of 44.3 million renter households across America, 22.4 million of them were “cost-burdened” by housing, with 12.1 million of them considered “severely cost burdened,” according to a report published by Harvard’s Joint Center for Housing Studies.

Researchers consider anyone paying more than 30% of their income on housing to be “cost burdened.” Charlie Bilello, chief market strategist at Creative Planning, calculated that based on mortgage rates and home prices, the median American family had to spend nearly 43% of their income on housing alone. Other essentials such as child care, groceries, auto loans and utilities have also risen over the past year, leaving little room to meet Sethi’s 60% target for fixed costs.

Higher costs have suppressed the amount ordinary people can save and invest. The personal savings rate in January 2024 was just 3.8%, according to the St.Louis Federal Reserve, significantly lower than Sethi’s target of 10% savings.

Put simply, the odds are stacked against the average American family. Nevertheless, households that can beat the odds and manage to save at least 10% of their after-tax income can achieve millionaire status.

Assuming a median household saves 10% of their median income of $74,580, they can deploy $7,458 in low-cost index funds that track the S&P 500. The S&P 500 has delivered a 10.3% compounded annual growth rate over the past seven decades. Based on these assumptions, the median household can achieve $1 million in assets within 28 years.

With this in mind, Sethi’s simple strategy is certainly practical but would require above-average income, above-average savings or unique sacrifices such as living with parents along the way.

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Vishesh Raisinghani Freelance Writer

Vishesh Raisinghani is a freelance contributor at MoneyWise. He has been writing about financial markets and economics since 2014 - having covered family offices, private equity, real estate, cryptocurrencies, and tech stocks over that period. His work has appeared in Seeking Alpha, Motley Fool Canada, Motley Fool UK, Mergers & Acquisitions, National Post, Financial Post, and Yahoo Canada.

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