One of the important prerequisites for a happy life is financial stability. Being super rich or living in poverty has nothing much to do with happiness. But what matters is how you spend the money you have. For a simple life, this means that you don’t spend money on things or services you don’t need. Again all that is relative with respect to your income and where you live. For example, using a car for transport is a luxury in India, while for Americans it might appear as a basic necessity.
My father told me the following 3 important financial principles in my early teens. At the beginning I ignored just like any other advise, but over years I realized how important these three principles are. Nowadays I make it a point to follow these principles and I have realized that it is essential for financial stability and happiness.
Rule 1 : Don’t spend more than you earn - This is such simple principle, yet many of us lead miserable lives by not following it. If you have a monthly income of $1000 and spend $1200 every month, you will soon run out of money. You will have to sell your assets or borrow money from friends, family or lenders and all that leads to a vicious cycle ultimately leading to financial disaster. I keep all my expenses in a register (I use AceMoney Lite) and finally cross check with my monthly income. I have set a target of 20% percent savings and if my expense is greater than 80% of income, I reduce my expenses by cutting on things that are least important.
Keep a personal expense register and look at expense reports at the end of the month. You may get a surprise looking at the monthly expense report. In my first month of this practice I was shocked to find that my expenses was almost equal to my earnings.
Rule 2 : Don’t spend the money that you don’t have now – This looks very similar to Rule 1, but what it means is that you shouldn’t spend money expecting any future income. Credit cards promote this type of spending and millions of people all over the world are suffering by not following this financial principle. If you do use you credit card, set aside an equal amount in your bank account (I actually maintain a separate bank account to pay credit card bills). Also pay up the full amount in your credit card statement preferably by setting up a direct debit instruction. The same applies to loans. When you are taking a loan, you are actually spending money that you don’t have now. Stay away from loans as much as possible.
I have taken loans in the past violating this principle and I repent my decision now. I am trying my best to prepay and close those loans. Loans and debts are like Damocles sword and you can’t sleep peacefully with them hanging over your heard.
Rule 3 : Always set aside some money as emergency fund – Last but not least you should have some money left in your bank account as emergency fund. The exact amount in the emergency fund obviously depends on your financial status. My recommendation would be to set aside 3 to 6 months of your personal income as emergency fund. I keep my emergency money in my wife’s bank account so that I am not tempted take that money for any other purpose.
The purpose of emergency fund is to have some liquid cash which is available instantly. In life anything can happen and we should be prepared for unexpected expenses. For example, emergency fund comes to your rescue when you have an urgent medical expense.
These are the three important financial principles that my father taught me and I intend to teach them to my children in future.
April 30, 2011 | Posted in Opinion No Comments » | By Jayson