The 20/40/40 Young Millionaire Budgeting Strategy

Most people dream of financial freedom, myself included, but few of us take the right steps early enough to obtain it. In 2023, Achieve conducted a survey on American adults with a series of personal finance questions; this survey found that only 1-in-10 Americans are living their definition of 'financial freedom'. On top of that, over half believe they are nowhere near reaching financial freedom and 36% of surveyees have less than $1,000 in their savings account (Achieve, 2023). Boy oh boy, what an American Dream that is. My goal in this post is to help you understand, and believe in budgeting, as well as prove to you that it is the foundation, the first and last step, the most vital organ and the very anchor that ties down financial freedom, which most young adults forget to toss in the water.

The traditional approach to budgeting often emphasizes saving a small percentage of income while allocating the majority to expenses, leading to slow financial growth. But what if there was a way to fast-track wealth-building without sacrificing financial security? Boom. Welcome to the 20/40/40 Young Millionaire Strategy. The 'Young' in the title might be misleading, to be clear anybody can take on this strategy, the numbers might just need to be tweaked a bit depending on your current financial situation. We will get more into that later on when breaking down the numbers more, but for now, what does 20/40/40 mean? The 20 stands for 20% of all income to be spent on needs AND wants. Yes… both, hence the 'Young'. The first 40 stands for 40% of income to be allocated to 'active' investments; meaning investments that are touched more frequently and potentially shorter-term in nature. Finally, the last 40 stands for the remaining 40% of 'savings' income to be stored away in long-term investments; meaning investments that you do not intend to touch for at least 1 year (ideally longer, like 10+ years).

First, the '20'. This first number is subject to change depending on where you are currently at in life and financial standing, but for the sake of this specific strategy I am going to assume you are all 'Young', (i.e. ages 13-25) with very few financial responsibilities if any at all. The '20' in this strategy really captures and exploits the extreme advantages of not yet having financial responsibilities such as: rent, groceries, utility bills, mortgages, insurance (of any kind), car maintenance/gas, etc. The ideal candidate for this exact strategy still has minimal living expenses to pay for at this point, and really only has to spend their 20% on: memberships (gym, entertainment, etc.), food (fast-food, sit-down restaurants, etc.), and social (nightlife, extra-curriculars, etc.). Obviously, these assumptions are just guidelines and each of us will have our own unique expenditures, if you pay rent, groceries, etc., then you will just have to tweak your 20% higher (which I will discuss how to in the next section). Now, for the general profile we can assume that this ideal candidate works full time (40 hours/week) for minimum wage ($17.20 CAD/hour, in Ontario, Canada). Salary before tax we'll say is around $35,000, after a probable 25% tax let's assume your take-home pay is around $26,000 annually. These numbers I am using are the bottom threshold to really show you the power of this strategy, as it is very plausible to make much more than this working full time at any age. When budget tracking I find it is most efficient to track by weeks, leaving us at $500 per week for the year. Not much right? Well, since we are extremely disciplined and stoic financial demi-gods, we will only be spending $100 of that on the expenses we mentioned earlier. How you allocate that $100 between your different expenses is up to you and unique to your personal lifestyle.

Next, the first of two '40's. This is the 'active' investment 40%, and will be the section that you dip into if you are at a point in life where you need more than 20% of your income for your more complex expenses list. Let's say sticking with the same example, salary is $500/week and you need $200/week to get by, then your strategy transforms into the 40/20/40 strategy where you expend 40% ($200) and actively invest 20% ($100). Back to the original case, what exactly do 'active' investments entail? Well, these are investments that you intend to most likely touch within 1 year, hence the description 'active'. These types of investments can include: individual stocks (speculative), day trading (stocks, options, forex; swing trading, technical analysis, etc.), business (start-ups, reselling/flipping, service job equipment, etc.), basically any actively managed investment/business. The idea of this first 40% is to maximize returns within a few months to a year which will allow for liquidity and flexibility with these investments. However, what you might have picked up on intuitively is that these investments will be of higher risk; now, this does not mean that placing the 40% on red at a roulette table would be justified as a valid investment for this section. There are definitely sizable risks associated with short-term investment strategies like day trading and reselling merchandise, so I would suggest doing your own due-diligence and research on strategies before you go throwing your hard earned money around. Continuing with the same example, I would suggest splitting up this $200 through multiple different active investments and a return of 20-30% annually in this section is favorable as-well-as obtainable with the correct research done before hand.

Finally, the second of two '40's. Potentially the most important and essential piece of the budgeting puzzle to unlock lasting financial freedom, and it's all because of one beautiful concept: compounding. This is the 'savings' investment 40%, where we allocate $200 (in this example) to investments that we do not plan on touching for at least a year, but ideally much longer than that (10, 20, even 50 years) thanks to our magnificent, borderline magical tool, compounding. We will get back to compounding in a second, but first to lay some guidelines on the types of investments that are valid for this section: savings accounts (HISA), large ETFs (S&P, Schwab funds, Vanguard, etc.), high yield dividend companies (individual stocks, REITs, div-ETFs, etc.), essentially any secure long-term investment that you are confident and comfortable leaving your money in for a LONGGGGG time. Again, within this section it is up to you and your own research on how you would like to allocate your $200 specifically, but I highly recommend putting some of it aside to build up an emergency fund for the first several weeks. It is usually safe to have an emergency fund that can last you 3-5 months of expenses with 0 active income, so for this example at $100 a week we are looking at an emergency fund of around $1200-$2000. This is quite low, but relative to our general profile here, $100 a week in expenses is also very low. As for the goal of this section, we rely on that spectacular tool of ours, compounding. A very favorable and realistic return from this section is around a 7% return annually, and I will use our ongoing example to show you the muscles of our good friend compounding. Let's just take one year for example, $9,600 of savings investment, employed at our goal of 7% annually and leave it there for 50 years. What happened? $282, 787.44, that's what happened. Now, imagine you stuck to the script and had 5 years worth of savings investment, $48,000, and left it employed at our 7% goal for 45 years. Did you hear that? is that a Gulfstream G650? You just made $1,008,117.68. You just became a millionaire when you retire, because you worked a minimum wage job and budgeted properly for 5 years when you were 14. Imagine you budgeted properly for LIFE? Combined with the fact that your salary is bound to go up throughout your career path? You could own the entire goddamn airport if you just Stick. To. The. Script. I'm going to stop myself now, because I could write an entire post just on compounding, and I likely will in the future.

To wrap this all up, I want to tie together all the moving pieces I just threw at you, and communicate the true power of this strategy to you. The #/#/# budgeting strategies are not new, I am not the pioneer who founded splitting your income efficiently into 3 categories, but I did fine tune the 20/40/40 strategy for my 16 year old self in order to give myself the best odds of fulfilling that dream of owning a Lamborghini one day, and let me tell you, I am 20 years old now and still kicking myself that I didn't think/learn about these concepts earlier. Just imagine if I had been throwing my birthday and Christmas money into the S&P 500 since I was 10 years old, it makes me sick just thinking about it. I also want to reiterate that it is never too late or a bad time to start; budgeting is always the first, and last step to financial freedom. I don't care if your 10, 20, 40, 70 years old, start today. I don't care if you have $0, $1,000, $10,000, $100,000 in debt, start today, your expenses section just might need to be a little higher than 20%. It is time to switch your mindset from a spender, to an investor.

Thanks for reading, I am excited to get this new blogging endeavor off the ground.

• Nolan Kushnir

Citations

Achieve. (2023, August 22). Only 1-in-10 Americans are living their definition of “financial freedom,” achieve survey finds. PR Newswire: press release distribution, targeting, monitoring and marketing. https://www.prnewswire.com/news-releases/only-1-in-10-americans-are-living-their-definition-of-financial-freedom-achieve-survey-finds-301906121.html