5 Habits of Highly Financial People
Master these 5 foundational steps to reach Financial Independence
“People who live far below their means enjoy a freedom that people busy upgrading their lifestyles can’t fathom” — Naval Ravikant
These are the 5 foundational steps towards financial freedom. They are not particularly glamorous but they are essential to master in order to gain control of your finances. Once you can comfortably tick off all 5 then your money will be working for you, your net worth will be growing, you will have a solid base and you will receive a level of inner peace that comes from knowing that you have your finances in control.
1. Track your Income and Expenditures Monthly
Track what you earn and what you spend. Every month. Every single penny. This will show you where your money is really going. Track expenditures with categories e.g. food, entertainment, coffee, bills, petrol, clothing , etc. The more detailed you can get with what you spend on, the easier it will be to redirect money to things that actually matter to you.
You can find free income / expenditure trackers online or as an app on your phone.
2. Create a Budget
The second layer on top of tracking income and expenditures is deciding what to do with your income. The easiest budget to start with is the 50/30/20 budget.
50/30/20 Budget
50% of your income (after tax) goes to Essentials (this includes groceries, housing costs, bills, essential transportation and healthcare, minimum debt repayment, other important necessities).
30% of your income goes to Wants (this could include things like restaurants, weekend activities, beauty treatments, concert/sports tickets, anything that is not essential).
20% of your income goes towards Savings and/or Debt Repayment (this could include building an emergency fund, holiday fund, paying off high interest debt).
Example: If your after tax income is $2,000, then $1,000 should be spent on Essentials, $600 on Wants and $400 on Savings and/or Debt repayment.
If you are able to spend less on Essentials, then this money can be reallocated to Wants and Savings. If you are spending more than 50% on essentials, then in the short term re-adjust the Wants expenditure and long term look into ways to reduce your Essential spending (or increasing your income).
3. Create an Emergency Fund
An emergency fund is a pot of money that is available to use in an emergency e.g. unexpected car/house repairs, medial bills, loss of a job.
This fund should be easy to access (e.g. cash in a savings account) and should contain 3–6 months worth your monthly expenditures. e.g. if your spending is $2,000 per month, then your emergency fund should have between $6,000- $12,000. If you happen to lose your job, then you have
a buffer of cash to help you through difficult times and this stops you turning to a short term loan or credit cards in an emergency.
4. Create a Debt Payoff Plan
We checked in on your debt already, but now is the time to make a debt payoff plan. Borrowing money comes at a cost (interest) and means that you will be paying more money back than you borrowed. If the interest charged on debt is high (the shorter term the debt, the higher the interest is) then this can quickly lead to debt building up growing out of control.
Start by listing all the debts you have in the space below — credit cards, student loans, mortgage, flash loans, money borrowed from friends and family — and also write down the interest rates you are paying.
From there you can either start to pay off the smallest balances first (snowball method) so you can build momentum to tackle the larger debts, or you can focus on paying off the debts with the highest interest rates first (avalanche method) this will allow you to pay less interest long term and hopefully stop your debt growing.
If there are any small balances / quick wins, aim to repay those. If you would like to calculate how much you are paying in interest, or how much you need to repay to clear debt in x months/years, you can use this free online tool: calculator.net/credit-card-calculator.html
It’s possible to pay off any amount, it just takes some focus, time and a plan.
5. Teach yourself about ‘Financial Independence’
In the last 10 years there has been an explosion of people sharing their finance journeys online — in blog format, podcasts, anonymous Instagram accounts, CNBC videos, YouTube and more.
There are so many good resources to learn from, and by finding people that resonate with you, you can speed up your journey. However there are a lot of scams online too, so if you are just getting started try to follow the ‘financial Independence’ theme for basic advice, tips and tricks. Specifically the following people are good to start with: Mr Money Moustache, Ramit Sethi, Afford Anything and Get Rich Slowly.
This article is an extract from the Financial Creativity: FOUNDATIONS workbook. Available free, the workbook is an 18 page interactive guide to mastering the basics of financial Independence. Get your free PDF print copy here: https://giftofayear.com/b/TH9YM
