Money. It makes the world go round. But, for all its importance, our schools and colleges hardly cover it as a part of the core curriculum taught to our young ones. As a parent, I decided to fill that gap…
(I wrote this for my own two children, attempting to put down all that I have learned in more than two decades of studying Personal Finance. Feel free to share it with your folks, if you find it helpful…)
Money is important. Some folks prefer not to talk about it, while others seem to go on and on about it. Some will hide their wealth from others, while others will generously give to a stranger. Some will not have enough to afford the day’s meal, while others will have more than what is needed for ten lifetimes! It takes all kinds, and you will need to figure out where your equilibrium lies.
My advice would be to avoid extremes, and find some middle ground – it will make more sense to you as you grow older (and wiser). Don’t try too hard to get this part right. Focus on the rules that come next.
And remember, much of this will not make you popular among your friends and colleagues. In fact, you will find yourself in the minority. But, stay on the path, and you will live a full Life…
Rule #1 – Spend Less Than You Earn
Whatever Life you choose for yourself (yes, even if you decide to live “off grid”!), you are going to need some money to survive. If you’re not careful, you will find that you have more month left at the end of the salary (or any other source of income) than you would like.
There is a simple and effective way to remedy that situation – Spend less than you earn. Few have the discipline to follow this advice. The biggest obstacle in its path is our impulse to “own” every shiny, new object we desire in a moment. Do this often enough, and you can say goodbye to any real savings you hope to accumulate in your early years.
The antidote? Spend some time thinking about the impulse purchases that tend to rack up, and eliminate those to start with. It helps to delay the purchase for a week and assess if you still want it. (Often, you will find that the feeling has passed!)
An invaluable tip to decide what to really spend on, is to think of it in terms of the time you spend using it. Don’t scrimp on the stuff that matters, like a comfortable bed, or an ergonomic workstation. The more time you spend using something, the more you can justify the spends needed to get it done right.
Rule #2 – Focus On The Big Rocks
Remember that story about putting the big rocks in the bucket first, so you can fill in the smaller ones later?
Once you’ve managed to curb those needless, impulse purchases, focus on the biggest recurring expenses you have, and apply the 80-20 Pareto rule. You will find that two or three major heads contribute the most to your spends – Review and redo them for maximum impact.
You will need to figure out which trade-offs are acceptable to you and your family. For example, your rent or EMI payments may figure among the top three expense items – Can you afford to shift to a smaller place or find a house further away to reduce this cost head?
Making changes will not be easy or without inconvenience. But, if you are constantly playing catch-up with your income/expenses, the rewards will be worth the effort.
Once you make a real dent in your “big rocks”, you should find yourself in a comfortable position to start accumulating some savings each month. Aim to save at least 10% (each month) in your first year, 20% next year, and so on, until you hit 40-50% in the first 4-5 years. You can tweak this later as your lifestage and priorities change.
Rule #3 – Understand Rent vs Buy
You’re part of the new millennium, and fortunate enough to be born in a world with possibilities. Don’t take advice from old foggies who lived in a different time. Be open minded to the new world order.
There is absolutely no need to Buy something (even if you plan to use it again and again), if there is a Rent option available that makes more economic sense.
Take the example of Music – my generation grew up on cassette tapes and CDs, and your’s on streaming music and the Internet. Buying the album you want will mean locking yourself into a format (that may not last your lifetime – think laser discs!), storing it (will you have enough space?), and accessing it with physical constraints (will it play on all your devices? on demand?). Buying a subscription to a streaming service, on the other hand, frees you up from all of those limitations.
In your lifetime, I predict you will be able to Rent/Lease stuff that we could never dream of – hugs, time spent with dogs awaiting adoption, the experience of growing an orchard. Choose “Rent”, whenever it makes more sense to do so.
Rule #4 – Safeguard Against “Risk”
Before you begin making investments, you must learn about the concept of Risk – in Life and with regard to your money.
Understand how “Insurance” works, and begin by buying the most-inexpensive term cover you can buy, for a cover that is at least 10-20x of your annual earnings. Then, get adequate medical coverage to protect against health-related contingencies. You can always add to this basket, as you learn more about your priorities and what’s right for you.
Once you’ve got adequate cover, understand what puts your investments at risk (inflation? unoptimized tax structures? taking on debt? lending your money to folks who will not be able to repay you?), and how to safeguard against them. Knowledge is the key, here. The more you understand Risk, the better equipped you will be to deal with its consequences.
Rule #5 – Learn To Invest
Savings will not keep up with Inflation. So, you must learn to invest. No, don’t rely on the so-called “professional experts” for the basics – their incentives are not aligned to your objectives. In matters of Health and Wealth, you must have the foundation knowledge necessary to get the essentials right. After all, it is your life. No one will care about it as much as you do.
Learn about the concept of Financial Freedom. Read stuff on Personal Finance. Examine the choices your friends and colleagues make – there is a lot to learn from others’ behavior, including what not to do. Know about the tax laws that apply to your earnings and investments. Understand the basics of how the economy works (yes, even if you don’t decide to major in the subject!).
Also, know that there is a lot of misguided advice out there – on the Internet as well as in Print. Figure out which folks make more sense than others. Figure out how to differentiate the noise from the music. It is not rocket science. You are an intelligent being. You can do it. And, once you get the hang of it, keep the momentum going. After all, learning is a continuous process…
Bonus Tip: Avoid Debt like a Death Trap – unless it is to build an “asset” (i.e. something that appreciates in value over time). For all other things, buy only what you can afford to buy without borrowing money. Unfortunately, that means saying no to that BMW you can “easily” afford on a 7-year lease plan. Remember, some of the wealthiest folks on this planet live far below their means. Borrow funds only if you can put them to work and build something that increases in value, instead.