Shaquille O’Neal’s 75/25 Money Strategy: Build Savings First, Spend the Rest

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It can be tempting to use every paycheck for purchases you don’t really need. Occasional discretionary spending is fine, but doing it too often can slow progress toward long-term savings goals.

That is why basketball icon Shaquille O’Neal follows a 75/25 money rule that allows him to enjoy part of his earnings while putting most of it toward saving and investing, according to a 2019 interview with The Wall Street Journal. Here is how the approach works and how you might adapt it to your own finances.

How the 75/25 rule works

The idea behind Shaq’s 75/25 rule is straightforward: set aside 75% of what you earn and live on the remaining 25%.

This will not be the right budget for everyone, but the general purpose of rules like this is to create a portion of money you can spend without guilt on extras. The rest goes toward everyday expenses and investments.

Start with an emergency fund

Saving money helps ensure you have cash available if a financial emergency comes up. Financial advisers generally suggest building enough savings to cover three to six months of essential living expenses and keeping that money in an accessible account.

After you have an emergency fund and enough saved for short-term needs and goals, you can begin investing for medium- and long-term objectives. Emergency savings are meant for quick access, so they usually should not be placed in higher-risk investments such as stocks.

Eventually, retirement may mean living without a regular paycheck. Social Security can help, but for many people it is not enough to maintain their current lifestyle. An investment portfolio can help fill the gap between Social Security income and monthly expenses while easing financial stress over time.

Applying the rule to a typical paycheck

Most people cannot save 75% of every paycheck. Even so, you can review your finances and gradually raise your savings rate. If you are not sure how much of each paycheck you save, tracking that amount and examining your spending can make it easier to save more.

You can also tailor the numbers to your goals. Some people prefer the common 50/30/20 budgeting framework, which directs 50% of income to needs, 30% to wants, and 20% to investing and debt repayment.

Even small increases matter. If you are saving 10% now, try to reach at least 11% next year. It is often easier to raise your savings rate when you begin at a lower level. Automatic transfers from your checking account to savings and brokerage accounts can also help by moving money before you have a chance to spend it.

Keeping emergency savings in a high-yield savings account can also help your money earn interest while it sits there. Some accounts currently offer annual percentage yields of 3% to 4%, though those rates can change over time.