Building long-term wealth starts small. It's boring and in no way exciting. But how should it begin?
Start small and start simple!
When my friend and I first started earning, we believed our income was too small to save any money. Our goal was to spend any remaining money on the final day of the month before our salary gets credited. For all the hard work we've put in all these years we've always felt entitled to spend our money the way we want. We wanted to spend it on grand dinners, weekend parties, travel, night outs and much more. We also bought expensive phones that we always wanted to have.
For instance, he earned 15k per month, out of which he had to pay 5k in education loan and needed another 10k for monthly expenses. This means he had no room to save. 5 years down the line, he earns 60k per month which is 3 times more money but the story doesn't change. He still says the same thing today. I don't have enough money to save. We are designed to change our needs as our income increases. When we feel we need something and we can afford it, we buy it. When our salary was low, we traveled by bus or walked. We went to small restaurants and ate what we wanted. As our income increased, we started traveling by bikes. Went to far away places and nice hotels. We mostly visited malls or movies. Today, we have modernized our lives and travel in cars. We don't mind spending five times as much on a weekend for a nice meal or a place to hang out.
As our income grows, our old wants turn into needs!
Undoubtedly, improving the quality of life is very important to us. But living below our means is more important. Our needs grow faster than our incomes grow. If our income doubled from 30k to 60k, our expenditure would have increased from 20k to 50k. In fact, our goal is to keep costs stable and increase our income.
Have you ever been in a situation where you have some money in your wallet and you suddenly realize that you spent it all but can't believe the fact that you actually spent it all? Or a situation like "My finances are simple. I get my salary at the beginning of the month and it is gone by the end of the month." Don't worry! There are many in the same boat. We have all been in that boat for a long time.
How to get out of this trap? Managing your cash flow is key here. Imagine you have a grocery store next to your house. How do you see your money there? You say - I spent Rs. 10,000 to the wholesaler and sold the items at 12,000. So I saved Rs. 2,000. Imagine that in order to buy a company's stock you need to see its performance. You will see how much the company is saved after deducting all its expenses. This is what you need to do in your personal life as well. You should look at your "cash inflows" and "cash outflows" and see how you can modify the cash flows to have better savings.
Getting Started
Do you remember when you were a child, you used to collect some coins and store them in your piggy bank? You did this every time. I made a deal with my dad that I could keep the coins for myself and give him back the change I got when I bought some thing from the grocery store. You rarely count how much is saved. You made one rupee at a time. And the piggy grew in size. You broke your piggy, only to surprise you with the amount you saved. This is exactly what you need to do today.
There are two ways to start. Savings First Approach and Expense First Approach
Savings First Approach:
A good way to start is to set aside at least 20% of your income. Regardless of your income, at least 10% should be set aside for long-term financial goals. It may seem very small in the beginning but this is where it starts. In a year you will start looking at your money from a different perspective.
This method is more suitable for those who have low expenses. If you are one of those who have less commitments like household expenses, medical expenses or EMIs, this is the best approach as you can afford to be more confident in setting aside 20% or more as soon as your salary is credited. By doing this you will know how much money you can keep aside for everything else.
Expense First Approach:
Another way of looking at it is to keep only what you need in your salary account or in the day-to-day account. This way you will be able to manage and control your expenses better. You will definitely have a rough idea of how much money you should be getting per month. Be it household expenses, monthly groceries or weekend parties. All these should be taken into account and only that amount should be reflected in your expense account. The remaining amount should be transferred immediately to your long-term savings account.
It forces you to stay within your limits. Keeping track of your expenses will be easy. Now you know where you are spending most of your money and can cut back on those expenses. You'd be surprised at the number of items that can cut your expenses in just a few months. Things that seemed impossible before now become clear. It can come out of anywhere. The extra bottle of soft drinks in your D-mart bill are actually not required. You may be watching too many movies. The cost of movies may not be too high but the popcorn you buy every time is expensive. Curb your urge to have popcorn once in two movies that can save Rs. 700 per month, you now have Rs. 8.5k per year.
Having a restricted budget to spend will force you to cut your expenses and therefore increase your savings.
Initially you may have to adjust the amount you have to spend. Once you get the magic number, the goal should be to keep costs down. You should force yourself to keep expenses as low as possible. This doesn't mean being stingy or not having the fun you deserve. It is very important to enjoy and spend on what you love. You have to find the right balance between saving and spending and be very careful about your spending. You should make sure that you only spend on things that you need. Momentary pleasure may be important to you but that doesn't mean you go to the pub every weekend, right?
"Life is short" I have heard many of us say. I know someone who has always had that belief. He always felt that life is short and should be enjoyed. And he did. He had good friends, partied often, traveled every year, wore branded clothes in his 30s, drove a Fiat Padmini. Unfortunately, he lived long to 60 years and that happening and enviable life was just for a short while. Within a few years he had to sell his car and travel on a 2 wheeler for the rest of his life. He was always in debt. If you look back, the reason he wasn't able to live his life the way he wanted to was poor financial planning. So to me,
"Life may be short. But unfortunately, life is very long for many of us. If we manage to live long, we must have enough financial capacity to cope with our lifestyle.
By the way, that man was my father. I learned very early in my life how important money is. You will have all the respect and support from your friends and family only if you are financially sound. Unfortunately, such is the world. :(
Remember, we haven't talked about investments or loans yet or how we grow our wealth. We'll discuss those in later chapters but it's important to build financial behavior before we actually look at those things. Once we master the management of our funds, leveraging them becomes much easier. You may have heard the rich saying, "Let the money work for you." That can only happen when you get your foundation right. Let us first work hard at building our behaviors, then we will automatically have enough money to make them work.
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