The Rule of Three: How This Simple Formula Can Lead to a Wealthier Life (2024)

FAQs

How do you build wealth using the rule of thirds? ›

Wealth Building Using the Rule of Thirds by Jacob Nayman points out that we can accumulate wealth following three main principles: "Make money; save money; invest money." To invest our hard-earned money correctly we can rely on the rule of thirds. This book explains how we should apply this rule in detail.

Basically, to accumulate wealth over time, you need to do just three things: (1) Make money, (2) save money, and (3) invest money.

The most commonly accepted notion regarding wealth creation can be summed up as follows – spend less than what you earn and then invest what remains wisely to grow your wealth.

Sixty% of wealth transfers are lost by the second generation, and 90% by the third. Only 10% of wealth passes beyond the third generation. The overall financial environment, income tax regulations, and estate tax laws fluctuate dramatically over a three-generation time-span.

It's really common sense, but budgeting, maintaining a consistent savings habit, avoiding or paying off debt, stashing money away in an emergency fund and spending less than you make are all pillars of building wealth.

The formula for how to build wealth is simple: spend less than you make and invest the difference wisely. The mechanism to take action on the formula and produce results is equally simple: adopt wealth building habits. The only question remaining is whether or not you will do what it takes.

One of the key ways to build wealth fast -- and over the long term -- is to earn passive income. And one of the best ways to generate passive income is to own one (or several) rental properties.

How do the rich build wealth? ›

While get-rich-quick schemes sometimes may be enticing, the tried-and-true way to build wealth is through regular saving and investing—and patiently allowing that money to grow over time. It's fine to start small. The important thing is to start and to start early. Earn money and then save and invest it smartly.

To summarize, money has taken many forms through the ages, but money consistently has three functions: store of value, unit of account, and medium of exchange. Modern economies use fiat money-money that is neither a commodity nor represented or "backed" by a commodity.

M1 consists of coins and currency, checking accounts and traveler's checks. M2 is a more broad definition of money. M2 = M1 + small savings accounts, money market funds and small time deposits. M3 is even more broad and includes M2 + large time deposits, large money market funds and repurchase agreements.

The idea is to divide your income into three categories, spending 50% on needs, 30% on wants, and 20% on savings. Learn more about the 50/30/20 budget rule and if it's right for you.

Spend Less and Save More

However, it is the key to your financial success. Though it is boring, only by spending less and saving will help you through your wealth management process. To create wealth, you need to have surplus funds to invest. Simply exhausting your income and not saving is not going to make you rich.

The money rule of three is a guideline for financial stability. It advises dividing your income into three parts: expenses, savings and investments. This division helps in maintaining financial discipline, ensuring savings and investment for future security while covering current expenses.

The Rule of 72 is a calculation that estimates the number of years it takes to double your money at a specified rate of return. If, for example, your account earns 4 percent, divide 72 by 4 to get the number of years it will take for your money to double. In this case, 18 years.