How to practically achieve financial success in life? It can be done by following a definite plan. But before going into the detailed steps, lets understand what pushed me to write this blog post.
Recently I was reading a book on my kindle and things came flashing down the memory lane. It was a short nice book narrating story of two friends.
After reading their story, I could not resist tagging myself to each and every chapter of the novel. I myself have gone through all those ups and down in life.
In fact, on the roads to financial independence, which is by no means easy, such ups and downs are common. Anybody who has walked those paths would realize that the journey was not easy. But what keeps one going…? When journey is not easy, how one can continue following the dream to get financially independent…one day. I am not sure if there is a simple answer to this question, but I try to give a one liner first.
Ones passion for “Good Money Management” is the trigger, and the goal of “Attaining Financial Independence” is the fuel.
At least for me, the ‘trigger’ and ‘fuel’ keeps me trending those difficult paths.
What I personally follow to keep my finances in order is explained in this post. I am using the following steps to practically achieve financial success in life.
Step 1 – Record all expenses
This is the starting point. No matter how bad is ones personal finance, this is where one must start. People finance gets out of hand only when one is spending more than one is earning. But the dilemma is, this mistake is often not visible. To bring ones finance in order, one must be fully aware and extremely sensitive to ‘every cash flow’ happening in life. Even if one spends just one dollar, it must be accounted. When I started my professional career, I was just a spender. Now after all those years, I wish I could have kept a record of all my expenses since day one.
Since last 7-8 years I am recording my expenses. I do not remember, if even once I went back to see what I spent in January of that year. But at the back of my mind I am aware that I have that data base in case I need.
But more important than database keeping, recording expense has made me extremely aware of my spending habits. More than anything else, now whenever I spend, I am nearly 100% aware that I can afford that purchase or I am overspending.
Believe me or not, this is the first giant step towards financial independence.
Start recording every penny you will spend henceforth. The power of this activity is immense. Its benefits (in long term) are huge.
Step 2 – Create Budget for all expense
When one keeps a record of all expenses a stage will come to take step 2. Recording expenses increase awareness. People becomes aware that last month they spend $100 on dinning out. This month they have managed it just with $80. This kind of comparative will start, and a clear pattern will start to emerge. Withing a matter of 3/4 months, you will realize that where you are doing good or bad, compared to previous months.
This is a stage where your mind will ask you to prepare a ‘budget’.
By this time, you will have identified and listed all your monthly expenditures. The activity in step 2 is to provide a cap/ceiling/maximum-limit to all those expenditures. This is what we call as budgeting. In a month you are not allowed to spend beyond the budgeted value.
At times over-spending’s will happen, but important is to be aware of it. Overspending in one area, will force you to compromise on other expenses. This is what will make you more ‘aware and sensitive’ to your spending habits.
Becoming financially independent is more about understanding ones earning and spending behaviors than anything else. Budgeting and recording of expense will take you miles forward towards achievement of financial independence.
Step 3 – Build emergency savings (1 month)
Do you have any safety net on which you can fall during crisis? Generally people live paycheck to paycheck. This situation is very dreadful and must be avoided.
Creation of safety net is essential. We take our jobs/salary for granted. This is specially true for those people who come from a family whose parents has been in salaried service. Children of business men are much mature.
No matter how big is ones salary, ‘creating and maintaining’ emergency savings cannot be avoided.
To start with, one must begin to keep aside money worth 1 months expense. Suppose ones salary is $50,000 and monthly expense is $45,000. He/she must start to build an emergency savings worth $45,000.
Park this savings in a separate bank account with objective of touching it only during times of extreme catastrophe.
Ideally one must keep growing this emergency savings month after month. But for the moment lets keep a target of building an emergency savings equivalent to ones 1 month expense.
Step 4 – Payback debts
Once one has 1 month worth of emergency savings stacked in ones account, the next step is to start clearing all debts.
These days carrying debt has become very common. People do not feel the burnt of it as everyone else is carrying a loads of it.
Home loan, car loan, personal loan, education loan, credit card debt are part of nearly everyone’s monthly expenses.
On an average, a common man spends nearly 50-55% of his income in payment of EMI’s. Ideally this percentage should be zero. How to do it…?
Prepare a list of all debts in the order of interest it charges. High interest bearing debt should come first. Debt charging lowest interest should come last.
Irrespective of the size of debt, the listing of debt must be done as explained above.
Once the list is ready, start making prepayments. The target should be ‘not to stop’ making the prepayments till the debt-list becomes nil.
Note: During the process of making prepayments, one must make sure that the emergency savings (1 month) is not being touched. Let that saving idle and earn interest in banks savings account.
Step 5 – Build emergency savings (8 months)
Step 4 will take some time. For a common man, achieving a milestone set in step 4 can be one of the biggest achievements of ones life. So after achieving step 4, do not hesitate to enjoy a grand party with your family.
This is a stage where one must start to grow ones emergency savings even further. People who are rich has substantial emergency savings stacked behind their back.
As a rule of thumb, a common man must start building emergency savings worth 8 months expenses. To do this, one must start adding funds to the savings parked separately in step 3.
But before one begin to do this, it is important to clear all debts. To make the use of emergency savings more meaningful and effective, it is essential that all debts are cleared.
But why all debt must be cleared? The way we are going to use these emergency funds from here can be applied effectively only when there are no debts to take care.
But before utilizing the emergency funds elsewhere, it is essential to first build emergency fund worth 8 months expense.
Note: As the time passes, ones monthly expense will also grow. Accordingly one must increase the level of emergency savings. Best alternative is to keep parked the emergency saving in high interest yielding savings account.
Step 6 – Save for retirement
After one has accumulated emergency savings worth 8 months expense, the next step is to start preparing for retirement.
In most cases, companies are obliged to take care of individuals retirement saving plan. But often these savings are not enough. To maintain the same standard of living after one has retired one needs more funds.
Hence it is only prudent to take the responsibility of generating retirement savings in ones own hand.
I will not recommend people to go for traditional retirement plans available in the market. Instead, following a SIP route will be better.
Retirement savings offered by companies are already invested in most defensive investment options. So we can surely take the liberty of investing our retirement linked savings slightly more aggressively.
The rule is like this, after one has cleared all debts and developed 8 months worth of emergency savings, start diverting extra cash to retirement savings.
Start an SIP in a balanced mutual fund and keep buying units each month. Idea should be to keep buying units till retirement without any redemption.
Step 7 – Buy & Accumulate Assets
In step 6 one is investing extra cash in SIP and building retirement corpus. Parallel to this, in step 5 emergency fund worth 8 month of expense is also established. This is a stage of really unleashing oneself.
It is important to note that, one must not invest more than 10% of ones income in step 6. Suppose ones monthly income is $50,000. Invest only a maximum of $5,000 in SIP as explained in step 6.
If one is able to generate more extra cash (higher than 10% income), they must start diverting them to buy assets.
In step 7 people really start becoming rich because here one start buying assets. Traditionally, people have become millionaire/billionaire buy accumulating assets.
Assets are not villas, cars, gadgets, or any items of luxury.
Assets are those things which either “generates income” or “appreciate in value” over time.
When we buy cars, is it an asset? Its value depreciates with time. Its not an asset. Moreover it cannot generate any income if used for personal use.
So this is our yardstick to identify an asset. Identify a good asset and start buying them with objective of income generation or capital appreciation.
There are several assets that one can buy. Keep them stacked for years and see it generate income or appreciate in value over time. More assets means more net worth.
Step 8 – Start your business
People who really want to become financially independent must take this step. Starting ones business ensures decreasing ones dependency on monthly paychecks.
I personally recommend that, by the time people reach the age of 35, they must starting looking options of starting a business.
This business can be anything. Take your pick. Ideally a person must introspect and identify ones inherent strengths.
Starting a business which commensurate with ones inherent strengths will make a world of difference. No matter how less gifted a person is, there is always a business-line established for him/her.
Start to take baby steps. Identify a concept. It is essential here to note that in the initial stages YOU will have to DRIVE things yourself. Do not expect a helping hand from anybody. Give shape to your business with your own hands and own imaginations.
I have personally found writing blogs as one of my inherent qualities. I liked the concept of money management. I combines both these traits and developed getmoneyrich.com.
It is very important to start a business which compliments your inherent skills. Every business will have several ups and downs. Ups are those milestones which are self-energizing, hence are welcomed. But down’s are real suckers. It drains the enthusiasm like nothing else. How to manage this?
This is where your inherent skills will kick-in. Let me explain, suppose you are good in sports and you want to start blogging on sports. No matter how bad your blog is performing, but still you will enjoy to read and write blogs about sports, because you love doing it. Your inherent skills and interests will keep pushing you out of even the most difficult of times.
Trick to become successful in business is, “Never Quit”. Keep trying and you are bound to gain success one day.
Step 9 – Payback to society without expecting anything in return
Though it may seem out of place, but personally I feel that this step is also important.
Successful men cannot be remain successful if people-around do not feel good about him/her. People will talk good only if you do good to them.
Idea is not to start bribing people so that they spread good-words about you. But idea is build a genuine affection for self in others.
The best way to do it is to HELP people. When you are genuinely helping, you will expect anything in return. You will just give support and retreat back.
When a person achieved financial success in life, it 75% his efforts, and balance 25% is due to “invisible force” that helped him/her to gain financial success.
No one can pinpoint and identify that invisible force. So the best alternative is to start helping others without expecting anything in return. Start with your parents, family, friends, colleges, associates etc. Idea is to be genuine and help others.