Here are money management tips that a middle class person can use to become financially independent and happy. Financial independence is possible with 15–20 years of these top 20 habits. I grew up in a lower middle class family in Visakhapatnam in the 1980s and have done ALL of these myself to become financially independent in my 30s, and grew the confidence to start my own business by age 40.
- For optimal happiness, Invest in experiences with people you love. A simple walk in the park or a long drive is cheaper than an expensive vacation abroad. It will also help from overspending on stuff to show-off.
- Keep yourself healthy by eating fresh home made food. Reduces expensive ‘eating out’ which leaks your finances.
- Keep 6 months to 1 year of cash easily available in liquid direct mutual funds. This will protect you from taking hasty life decisions when under pressure. Do not chase high returns here.
- Buy a term life insurance policy if you have dependents or responsibilities that your corpus cannot meet.
- Buy a good health insurance policy for your family and dependent parents.
- Dont buy expensive depreciating assets like cars. You lose 30% on day 1. Once you become wealthy, you can splurge a bit. But until then optimise.
- Automate your Investments through systematic plans, so that you dont have idle cash lying around (gets spent easily).
- Save and invest atleast 50% of your income. This one formula alone will get you financial independence in 15–20 years.
- Keep amount required for next 3 year goals in a safety corpus. Helps you sleep better. If you like to, make it 5 years worth goals to feel safer. Invest this safety corpus in zero risk instruments backed by the Government such as Public Provident Fund, Employee Provident Fund, Sukanya Samruddhi Yojana and Government Security Bond Funds. Do not chase high returns here.
- Invest all your savings, other than liquidity (#3 above) and safety corpus (#9 above), into growth assets linked to equity investments.
- Invest in index equity funds which is the simplest and cheapest growth instrument. Helps you beat inflation.
- For higher returns in equity / growth, use a high quality investment advisor if you can. They will help you identify high quality businesses (low debt, growing, good promoters) and rebalance regularly; owning them is the best way to compound your wealth. Remember that return of investment is more important than return on investment. Done well, your financial independence can come faster, may be in 12–15 years.
- As your income grows, beware of lifestyle inflation. Dont start over spending. This can be only done if you know how to get the most happiness out of your spend and keep things optimal (#1 to #5 above).
- Do not buy more than one house. Real estate may sound safe but has hugely underperformed equities over 10+ year timeframes. It is illiquid, has maintenance expenses, taxes and may come with concerns of encroachment or bad tenants.
- Avoid buying investment products from insurance companies (eg: ULIPs, endowment plans). They don’t create wealth and take you in the opposite direction.
- As your corpus becomes larger, consider having upto 5% assets in gold. Treat jewellery as an expense (ie not an investment).
- Avoid investing in highly speculative instruments such as Ponzi schemes, cryptocurrencies, loss making company IPOs.
- Avoid loaning large sums of money to friends, or writing surety for their loans. You may end up losing both your money and the friendship.
- Once your corpus reaches (25x to 30x times your current annual living expenses) + (all goals such as child education), you have attained financial independence. Eg: 10Lpa expenses * 30x = Rs 3 crore, + 50L education expenses = 3.5 crores in today’s value.
Congratulations, you are no longer tied to your salaried job. You are free to what makes you happy! - Finally, treat everything in life as a blessing and be grateful for the health and wealth. As Einstein said, everything in life is miracle or nothing is a miracle. If you believe that everything is a miracle, then you will agree that money and finances (while being important), are a small item in the bigger scheme of life, relationships, experiences & happiness.
Share this with other friends to make them financially independent and happy too!
