It is common perception that the “rich” had an extraordinary stroke of luck which created their fortune for them or that you can only inherit such immense wealth, your day-to-day money habits are what draw the line between a comfortable life and a “broke life”.
A “broke life”, as we are using the term, refers strongly to the situation of constantly being short on cash or staying in constant debt.
Have you ever wondered how it is that two people who earn roughly the same amount every year can manage to live two absolutely different lives? While one person seems to be thriving with that sum, the other cannot manage their finances with it. They’re constantly stressing bills and not having enough money.
It is each person’s financial choices that will determine which of these two categories they would settle in.
We’ve come up with a list of the best financial habits of rich people to help you ensure you cross over to the correct side!
Save Before You Spend
Most of us tend to get our post tax pay checks and use it to first meet our spending requirements, only saving what is left. But that’s working backwards. Priorities are reflected in the way you handle your money and if you value your current spending over building wealth, then you’ll have plenty of things - but not much wealth. Ideally, you should take a cut out of your pay check and allocate it towards savings and investments and only spend what is left after that. We understand that everyone’s situations may be different and it doesn’t always seem possible to save money. Therefore, we recommend starting small. You don’t necessarily need to start with thousands of rupees a month, you could start with amounts as small as Rs.100 and grow it as your income grows.
When youngsters start working, they rarely think of investing their money. It is a common perception among people today that investing is for when you have job stability or when you reach a certain age such as your 30s or 40s. However, this is not true. One should start investing their money as early as is possible. This gives the money more time to grow. Even the smallest amounts can be invested at earlier stages to get a start.
You might have heard of the appeal of leverage, commonly adopted by businesses worldwide. However, the same does not apply to your personal finances. When it comes to your personal finance, you should avoid debt as far as possible. Credit card bills, massive education loans and other forms of credit have made it nearly impossible for youth to build wealth today. This debt enables reckless spending and leaves you in constant worry of future bills. If you are currently in debt, then you must first try to get rid of the debt before you can begin building wealth.
Limit Your Spending
As we have mentioned before, you must save before you spend. But now the question arises, how much should you spend? Ideally your spending should be restricted to a relatively low percentage of your income but that again varies with your individual circumstances and responsibilities. For a person who is just starting out their career and having little to no responsibilities, spending could be between 10-20% of their income while a married man with kids might land up spending a significantly higher percentage of their income, say between 40-50%.
Create Your Own Heuristics
A heuristic is a rule of thumb that helps you make Financial Decisions quickly and smartly. These become very important when dealing with personal finance as you can make quick decisions without worrying about compromising on the quality of the decision. For example, if you decide that you will not spend more than Rs. 2,000 on a bag or more than Rs. 10,000 on a good watch, it will help you immediately eliminate choices that seem attractive but lead to overspending.
Set Your Financial Goals Now
One of the most important factors that can affect the success of your financial plan is your goal setting. Behavioural Finance points out that several people tend to ignore goal setting and merely start investing money for the sake of investing. This leads to more loss than gain. Having a goal that you strongly desire helps you to stick to your financial plan even during tough times. For example, you are more likely to stick to your investment plans if you know that the money you are saving is being kept aside to buy a new house within the next three years as opposed to “saving for my future.”
Create A Cushion
As crucial as it maybe for you to save and invest your money, it is equally essential for you to keep aside some money as a cushion for emergencies. While we would all hope to never have to dip into such a reserve, circumstances may arise where our cash needs considerably exceed our expectations. At such times, having an emergency cushion kept aside helps you not only to meet your expense more comfortably but also to avoid using your investments as a bailout.
Increase Your Income
It is becoming increasingly popular for people to take on more roles or ventures in order to maximise their income. This helps you to create a secondary source of income to rely on in case of any instability with your primary source of income. With all the energy you are given, you can either focus on cutting down your expenses or increasing your income. Choose the more lucrative option and expend energy into creating wealth.
Sometimes, despite having the best intentions at heart, a person may not be able to implement any good financial habits. This might not be for lack of effort or thought on their part but rather their emotional biases. Behavioural Finance points out several instances and conditions where people’s emotions play so strongly that they are unable to view their money objectively. Getting an expert like a Financial Planner helps you to see the bigger picture and to view your money objectively. This outside perspective can turn into a game changer for some people.
Another thing to keep in mind while focusing on wealth creation is the tax situation of the country you reside in. Most countries offer tax incentives on saving and investment schemes to promote them to their citizens. Several of your current expenses might also be tax deductible. It is always a good idea to meet with a tax planner and take their advice on how to invest so as to maximise wealth while also reducing taxes.