10 Simple Rules that Brought Me Financial Nirvana

This post was originally published on Safal Niveshak, and has been posted here for the benefit for the Rodinhooders.

I was in Ahmedabad recently for my Art of Investing Workshop, and met a few young executives – in their mid 30s – who had questions about how I have managed my own financial life so well so far.

A couple of them were, in fact, amazed to hear my story and told me that I have been an exception.

“That’s not true!” I told them. “I have not done anything special in my financial life that anyone else cannot do.”

In fact, whatever I have done to bring myself to a stage of financial nirvana – if I may use that term – I have done with the help of some simple rules on how I treated my money over the years.

Now, while I am too young to dispel any life-changing advice on “how to be a financial rockstar” or “how to remove all financial worries from you life”, I am happy to share below 10 rules that have changed my life for the better over the past few years, and how these can also benefit anyone who practices them with discipline and integrity.

Here are those 10 rules.

Rule #1. Save, Save, Save
Save at least 10% of your net take home pay during the first year of your career, 20% in the second year, and so on.

Plan to increase it to 50% in five years. Saving more is always good, but 50% is a number you must certainly target.

The best way to meet this target is to follow this simple equation of “Income – Saving = Spending”. First save, then spend of what remains.

When people get amazed to know how I managed to get debt-free before I turned thirty-three, please know that this formula helped me a lot.

(“Debt free before thirty three” can be a nice rhyme kids can be taught in primary school) 🙂

Rule #2. Restrict EMIs
Never have your EMIs – on home loan plus car loan plus any other loan – more than 30% of your net take home pay. If you have extinguished this limit, don’t borrow any more money.

The highest I ever went to was 40% after I bought my car in 2007, but brought it down to under 30% after I repaid the car loan in 2008 from my savings.

Since 2011, when I repaid my entire home loan, EMIs have been 0% of my income, and that has added to the confidence with which I am living my life.

Rule #3. Create Emergency Fund
Create an emergency fund that is at least 6 months of your household expenditure. Keep this money in your bank account or in a liquid fund.

Don’t touch this money to pay for a new car’s down payment! This money would help you when misfortune strikes in the form of a job loss or illness.

I had an emergency fund of 12 months when I decided to quit my job. Luckily, I did not have to withdraw even a single rupee out of it. But just the thought that I had an emergency fund brought me a lot of emotional comfort while making that life-changing decision.

Rule #4. Buy Medical Insurance
Even if your company provides one, buy a personal medical insurance policy that will cover you and your family even when you quit your job or are out of job.

I know the importance of having a medical insurance, as I benefited from it when my daughter Kavya fell seriously ill when she was just two years of age. Not having a medical insurance would have enhanced my trauma.

Rule #5. Buy Term Insurance
If you have dependents, buy term insurance.

How much? If you are 30-40 years of age, have 2-3 dependents, and have zero liabilities, insure yourself for at least Rs 1 crore.

Also, if you are 30-40, have zero or less loan liabilities, and maintain good health, there is a good probability of you surviving the next 30 years. So don’t get overboard with the cover. A maximum of Rs 2 crore should be enough.

Rule #6. Pay off High Cost Loans
Try to avoid high interest loan like credit card or personal loan. But if you are unfortunate enough to owe one, pay off as fast as you can.

As Charlie Munger says – “Once you get into debt, it’s hell to get out. Don’t let credit card debt carry over. You can’t get ahead paying 18 percent.”

I have never borrowed a credit card or personal loan, as I know these are things that could kill me financially.

Remember – If you wouldn’t buy something in cash, don’t buy just because you can use a credit card or borrow a personal loan.

Rule #7. Never Borrow for Liabilities
Avoid paying interest on anything that loses value.

A car – especially a big one that you may not need but to show off – tops this list. Electronic toys – mobiles, tablets, LCDs etc. – come next.

You may still buy a car (one car) on loan, but try to repay that loan as fast as possible. Also, see to it that the EMI does not lead you to cross the 30% EMI-to-salary criteria.

Please remember – for whatever the banks will tell you, a loan would never bring you peace of mind. Too much of it, in fact, can be a road to hell.

Rule #8. Repaying Home Loan
If you have an option of paying off your home loan versus investing that money, know that it’s both a financial and an emotional decision.

Avoiding paying off a 6% interest (post-tax) home loan and instead sensibly investing that money to earn 12-15% return is a good financial decision. On the other hand, clearing the home loan instead of investing that money is a nice emotional decision.

I went by the latter when I was quitting my job, but you can choose to do the former.

Rule #9. Know the Priorities
Don’t invest in the stock market – directly or through mutual funds – till you have an emergency fund, medical insurance, and term insurance in your kitty, and also till you repay all high-interest debt.

In fact, don’t invest any money in the stock market that you may need in the next 1-2 years. If your stocks fall in this short period of time, your financial life may get compromised.

Rule #10. It’s Not (Always) about the Money
While these rules will help you take better care of your money and financial life, remember to not get too focused on these things that you lose out spending time on the real joys of life.

As a wise man, or maybe a woman, once said, “No matter how hard you hug your money, it never hugs back.”

What do you say?

About the Author: Vishal is the Chief Tribesman at Safal Niveshak, where he works with small investors to help them become smart, independent, and successful in their investing and personal finance decisions.