In this article, I will try unveil the importance of creating and maintaining a solid financial foundation on which our economic future will develop. As the current scenario shows, practicing these good habits is the only option. Take note of these helpful tips and try to carry them out as soon as possible. At the end of this article I will put a couple of real examples on the application of these tips.
Good Financial Habits
Our plan begins with the establishment of what is known as an emergency fund . An emergency fund is that amount of money with which we could subsist for at least 6 months in case our source of income was reduced to zero.
Let’s put ourselves in a real situation. Let’s imagine that our monthly income is 1 lakh Rupees. Reducing our standard of living to a minimum, we estimate that we would need about 50,000 Rupees per month to survive. This means that we would need an emergency fund of at least 6 months x 50000 Rs = 3,00,000 Rupees. For this collection, we could allot a certain monthly amount to its construction, say for example saving 25,000 Rupees per month. From this perspective, it would take only 12 months to meet our emergency fund.
It goes without saying that this money is reserved only for the extreme case of zero income or below our minimum standard of living (before we talked about 50,000 Rupees/month of emergency fund, but this depends on the situation and expense of each person).
WSI Method (Work-Save-Invest)
The acronym of this method stands for Work, Savings and Investment (Work-Save-Invest). This is the surest path to a healthy economy, as well as being the one that projects the best long-term results.
W = Work
It’s about getting a source of income with which we can shape our economic future. Of course there are many ways of working, but I would roughly classify them into two groups: Those in which you work for a boss, and those in which you work for yourself.
I don’t want to go into too much detail about the advantages and disadvantages of each group, as I planned to dedicate an entire article to this topic, but I will summarize them briefly. Those jobs in which you have to report your boss, in most cases, financial security in exchange seems to be a lower income. And those in which you are your own boss will not report the aforementioned level of security, but in return you will get a higher income.
S = Savings
We will not be able to grow financially, if at the end of the month the capital of our account is zero or near to nothing. You have to save money to make money, because otherwise our financial condition will not have changed from the beginning to the end of the month.
I will never be exhausted from repeating the importance of saving in the personal economy. We are here to be richer next month than the previous month, and that is only possible by saving. Of course, there is no use saving for months and then “burning” those savings on a vacation trip or a new car.
I’m talking about saving to invest, which brings us to the third point: The best way to save is to set aside a percentage of money for savings at the beginning of each month. In this way we adjust our standard of living to our economic plan, and not the other way around.
If your goal is to become wealthy, remember this helpful tip: The first step to wealth is not to appear rich. I would like to dedicate several articles related to the topic of saving as it is one of the most important.
I = Investment
It is not enough to save every month. Well, actually, it would be enough if we were conformist people and without a view towards financial freedom. Assuming this is not the case with my smart readers, I present to you our valued term, investment.
What is investing? What is it and how is it done? A person invests his money with the ultimate aim of seeing his capital multiplied in a given period of time. It is not my intention to offer an entire investment course in this article, because I’ve already dedicated several articles related to investment in this term.
For now, it is enough for us to know that there are two types of investments: investments in Fixed Income, which carry low risk and low interest, and those in Variable Income, which provide us with greater benefits at the cost of greater risk.
Real examples on the application of these tips
These are the three steps to follow to have a healthy economy and, with a little more effort, achieve the desired financial freedom and make money work for us (instead of us working for money). Let’s now see a couple of real examples in which two people are going to apply these tips step by step.
In this first case we have Harshit Papnai, 25 years old and with a full-time job that earns his 1 lakh Rupees every month. Harshit has just read this article and decides to get down to business.
- Estimated amount with which he could survive for 6 months, reducing his standard of living drastically and with zero income: 50,000 Rupees
- You need an emergency fund of total 3 lakh Rupees i.e. (6 x 50000)
- Currently you can afford to save 25,000 Rs / month, so you will reach your emergency fund in 12 months
After 12 months, Harshit has his emergency fund and decides to continue with his financial plan. In this time, Harshit has managed to rejoin in his job position and his current salary is 1.3 lakh Rs / month. Of course, that extra amount is going to be used to achieve his financial goals: Now, he wants 10 lakh Rupees after 2 years, so the risk associated with his investment profile will be moderate. To get this 10 lakh Rupees in 24 months, without having a good investment plan, you would need to save 40,000 Rs / month for 24 months.
However, during the previous 12 months he was very concerned about the importance of a good financial rescue plan and was reading books on investments: Now he is an expert in Equity investment and is capable of achieving 6% per month. That is, if you invest 10,000 Rupees monthly, another 600 Rs will be the return of your Equity investment.
Applying the simple rules of compound interest-
After 24 months Harshit will have achieved € 20 lakh Rupees instead of just 10 lakh Rupees ! Look, dear readers, how a correct investment in the stock market makes a difference. In this example we have assumed that Harshit invests 40,000 Rs per month for the current month, plus what he obtained in previous months.
Bhaskar, age 30, is working in an office for a salary of 1.5 lakh Rs / month. You have already carried out your emergency fund plan , and now you want to get 20 lakh in 2 years , having to save 80,000 Rs / month.
He is a successful speculator in the financial markets, with a solid and proven trading strategy that earns him a juice of 10% return per month, therefore his investment profile is risky. Therefore, consider that by saving only 40,000 / month you will achieve your goal. To do this, he performed a simple calculation and came to the conclusion that, saving 40,000 Rs / month (instead of the 80,000 Rs / month that he should save to achieve his 20 lakh Rupees without an investment plan), after 24 months with investment he will have a considerable 45 lakh Rupees instead of the stipulated € 20 lakh Rupees .
To achieve financial independence, it is only necessary to follow exactly mentioned in this article. No more no less. As you can see, neither Harshit nor Bhaskar would have achieved (and exceeded) their goals without:
- Monthly income
- Monthly savings
- Stock investment
And the most important thing about investing in the stock market is the reinvestment of profits. If you make a profit on the investment, you simply have to reinvest it so compound interest can work its magic.