“The key to becoming wealthy is the ability to convert earned income into passive income or portfolio income as quickly as possible.”
– Rich Dad Poor Dad
I couldn’t agree with this statement more. (And I recommend reading this book!) Earned income is literally your income from your employer, which is taxed at about 30-35%. Passive income is money you earn from investments, which is taxed at 15% (and often your investments will grow by 5-15% per year depending on what you invest in). The first step to converting earned income into passive income or portfolio income (purchasing a home) is budgeting.
It goes without saying that you should spend less than you make. This spreadsheet can help you keep track of how much is coming into your checking account and therefore how much can leave it each month. Use it to decide how much you will save and invest after taking mandatory expenses into account.
In the video below, I demonstrate how I use this spreadsheet for my own personal finances.
So, after inputting the amount you’ll spend, save, and invest each month, you’ll see your final checking account balance. Remember, the goal is for that balance to always be close to $0, but never negative. You can then plan months or years ahead to make sure you’re saving enough to meet your financial goals (whether that means paying off mortgage each month, saving to purchase a car, etc.).
The key here is to spend as little as possible so that you can put as much as possible into savings and investments. For many of us, the most important thing is discipline.