A simple guide to good money habits
- Wandile Nyundu
- Mar 24, 2019
- 6 min read
Ever wondered how you will ever achieve personal financial freedom in an instant? It seems most of us share the same dream to soon reach a financial destination where we would never have to work again. The idea of leaving your job to enjoy afternoons in a blissful paradise, where you get to do nothing all day but to enjoy bottomless cocktails by the beach. Sounds too goods to resist right!
Most of us have the desire to chart our own financial destinations and to enjoy a quality of life where we no longer have to trade our time for money. The bad news is that positive thinking won’t get us there, but the good news is that taking timeless, tried and tested practical steps, beginning today, you can take baby septs toward reaching a level of financial security that a few get to enjoy.
The below are a few universal principles we can use to begin creating a future where we enjoy greater financial freedom. This requires very little money to get started, and applying these strategies diligently and repetitively will help redesign your financial habits.
The number one rule of building wealth is to not lose money
Most people enjoy indulging a fantasy where they think that most people with fortune got there by taking giant risk and throwing all caution to the wind regarding how allocate money. But the truth is, almost every wealthy person is obsessed about how not to lose money. As simplistic as it may seem, consider the fortunes we have have wasted or lost on frivolous things over our working career. Wealth building is about deploying your money toward high value producing transaction, these could include investments, experiences or necessity based values. The money you don’t lose has the opportunity compound and grow over time. If you haven’t accepted the power of compounding and it's effect on your finances over the long-term, please see this video by Warren Buffet on the subject.
The wise thing to do is keep your overhead low while gradually improving your investment funds allocation and learning the needed skills to grow those investments using more efficient tools and strategies.
Now I know this may seem a lot to begin with, so start with a forced saving system where you take 10% to 20% of your income and keep it out of your expense allocation. This amount goes toward your financial security account, and as you continually build this fund until you reach a critical mass to effect that the interest alone covers your monthly essential expense.
The borrower is a slave to the lender
Consider how much money you currently spend on servicing debts, interest and admin fees? Think of how much disposable income you would enjoy if you didn’t have to keep sending money toward making payments toward things that bring you very little joy and leave you poorer each month? The savings made from the interest you would no longer have to pay on debt can add up to a small fortune over time. Start by paying off any debt you may have from the smallest to largest amount. The objective here is to temporarily use whatever additional surplus income you may have, once you have provided for the essentials, to pay off the smallest amounts sooner. This is an effective psychology hack to employ, as these small wins you get from paying off the smaller amounts in quick time, give you the momentum and income to settle your other obligations and create even more disposable income.
Doing this will free up your income and allow those surplus funds to start building your financial security nest egg. Security begins when you have no debt except your bond and have an emergency that could cover up-to six months of your living expenses. Can you see how this would lead to better quality of life, as it would allows you to change careers, relocate or start your own businesses when the time came, with minimal risk to your financial wellbeing? Now it may take you some time to pay off bad debts and start building your financial surplus and if you have a big mountain to climb don't be despondent. I have found Warren Ingram's advise to be useful in helping me to organise my thoughts around this topic.
Getting out of bad debt should be a short term objective and depending on your personal situation, this should take you as little as twelve months to five years to do. For example, if you had no debts to pay and had designed your lifestyle in such a way that ideally you could live and enjoy your life on less than 60% of everything you make, you would have the other 40% to contribute each month toward increasing your wealth.
Make an increasing percentage your income yours to keep
The second step to personal and financial freedom is to continue to grow your income, while investing an ever increasing amount of it. Too often people get stuck here, attributing their inability to allocate increasing funds toward investing to an insufficient income. The trick to doing better in this regard is to understand that the amount of money we have the capacity to earn is directly proportional to our self worth. So if you don’t value yourself enough to prfioritize your financial destiny then the chances are that you will always have to trade your time for money, instead of having money work for you. The goal should be to accumulate enough of a lump sum that the interest from it alone pays you the equivalent of your needed income.
Getting to this point necessitates that you aggressively increase your income and improve your investment skills and knowledge over the mid to long-term. At this step in the process, you will need to work toward at least doubling your annual income every one to two years for over a decade! Clearly this process isn’t the popular “get rich quick” model you have previously bought into. Here are a few ideas I found helpful to help get your mindset geared in the right direction.
I have found that applying a strategic and systematic approach allows me to build both the skills and character needed to advance and sustain the wise and intelligent use of wealth to afford myself greater degrees of financial security over time. More often than not, we opt to indulge in consumerism and immediately gratifying habits that may compromise efforts. And we have all done this haven't we? As we start making a little more money, we tend to simultaneously increase our living expenses, so don't fall victim to that kind of thinking.
Remember you cannot out-earn bad financial habits. To help me in resolve this, a resources I have found useful in transforming behavioural change related to money is to set a budget and keep to it. How often do things just happen you your money and are left clueless on where it all went? Allowing small, seemingly inconsequential transactions to go unchecked is what could be draining your wealth. I use a budget tracking app called 22seven to help me set and keep to my monthly financial plan. This App links to your bank account details and help you see exactly where your money is going by catagory and can help you be transparent with yourself about where the bulk of your income goes. Hopefully the reality of how much we waste on frivolous expenses will help us reconsider our habits and possibly result in making a few adjustments to make more funds available for saving and investing for our futures.
Determine how much you would need on an annual basis in order to earn, in interest, the annual nett income needed to fund that lifestyle. To make things easier it’s important to first define what success, related to your finances, looks like. This is so that you can set reasonable outcomes and measures of success over your lifetime.
Remember, you get to keep what you don’t lose and every bit adds up toward funding your financial indipendance.
Consider how actioning even one of these ideas could affect your long term trajectory?
Applying these principles will require the discipline to committed long-term actions and delayed gratification. The truth is, fast money rarely ever lasts and usually causes more harm than good. Think of the number of lottery winners that have had their lives ruined as a result. Be careful of not going to the far end of the spectrum and become a penny pincher. Learn the art of celebrating small wins and rewarding yourself and your loved ones for being diligent and disciplined along the journey.
Here are a few of my personal favourite resources that help my thinking, planning and actions regarding money:
Books:
Online resources:
- WN
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