A few years back I made an effort to calculate my entire earnings from my employment over the years, which included salaries, cash benefits and bonuses. It was not easy to recall all the details but it was not that difficult either to come to an approximate number. I then compared it with my investments and savings over the same period and the result was a big revelation to me. It made me realize how small is my investment out of the total earnings I have had over the years. It was a big disappointment at first which then turned into anger at how careless I have been in managing money, which in turn made me come up with a financial plan for the next 10 years.
Many people have this mantra to live life to the fullest, and most often it is about spending on things that they feel would bring happiness than trying to find happiness through other means. I was one of those people. And it is very easy to fall into this trap if you live in places like Dubai where you get a minimum of ten calls a day from banks and credit card companies offering to lend you money at relatively low-interest rates, irrespective of how bad your credit situation is. Easy access to money makes you feel richer than you really are which in turn make you spend more than what you earn. Then it becomes a never-ending cycle of borrowings and depositing your salaries and bonuses on credit cards. When you are in this cycle the size of your debt always looms above your head leaving you helpless to make any decisions be it about a career move, relocation or even expanding your family, and you become enslaved to your own financial misgivings.
It’s not easy to come out of this financial tangle but with some effort and some compromise on ego as well as lifestyle, can set you up for a better financial future. I am not a financial guru but if I were to give some tips to my younger self then it would be these.
Assess your financial situation and set financial goals: Put together your net worth tracker, it can be a simple excel or an online net worth tracker. Then compare it with your earnings over your life time and look how it fares. It will open your eyes as it did to me and will also help you to come up with a plan on how you can improve the situation going forward. It can then become your financial goal which can be fine-tuned with time.
Come clean of debt: I recently read somewhere that one of the most common aspects among the real rich people is that they are all free of personal debt. So that can be a place to start with, put up a plan with timelines to get debt free. It might look easy to leave your debt on your credit card and keep paying a 3%+ interest month on month, but if you do the math that’s a staggering 36%+ interest per year. So get credit card debt out of your way first and then move to the other ones.
Use credit cards sparingly: Go old-fashioned, use cash more often, feel it in your hands and let your eyes see it being given out. In today’s world it’s impossible to go totally credit card free because you will need it every now and then for your online transactions, but keep its use down to as minimum as possible and pay the outstanding on your credit card at the end of each month without failure. If you find visiting your ATM every now and then and carrying big chunk of cash in your wallet as not practical then get small fireproof safe for your home where you can keep cash, this way your ATM is in your home.
Keep an income & expense plan: Open an excel file and prepare a budget projection for all your income and expenses for the next 12 months. Put all your incomes like salaries, allowances, potential bones etc.., and then put you expense heads below it from Groceries to rent. This will give you an idea about how your expenses are expected to do vs. your income. Plan it in a way that you always have savings by tweaking your expenses to be lower than you income. Then keep tracking the actual every month to make sure you are meeting your set savings target.
Invest your savings wisely: A common investment advice I get from elders is to put the money in real estate; they say real estate investment can never fail. It can be right depending on the economic situation of the place where you come from but do your math, if you are investing in a place where real estate investment is expected to double in 8 to 9 years with a heavy tax burden on capital gain and longer transaction time then it may not be any more attractive than having a fixed deposit with an 8% interest per year (Depending on where you are from). So don’t go blindly with advice, do your number crunching based on the data available and also take into consideration your financial goal before deciding on your investment portfolio. There are several options out there with different risk –reward ratio from stocks to commodities, educate yourself and then pick wisely.
None of the things mentioned above is out of the world ideas, these are common sense, but despite it being common sense most people don’t apply it in life. If you are not already on the path to financial freedom then give it a try to it will make you feel much better.