Living within our means is both art and skill — But can deliver fascinating rewards in life

The road to Financial Independence (Part 2)

Note: This article continues from my earlier post and can be found .

Step 2: Saving Money

Now that we’ve covered the first step in creating wealth, learning to manage the next two steps are critical, otherwise one is typically doomed to be broke and living a hand-to-mouth existence.

Next is the hardest part of building wealth in my opinion — saving money. Depending on your preferred lifestyle and cultural views on spending money, this step can seem pretty hard, or almost impossible.

#LifelessonFlashback — My monthly salary back in 2004 was INR 12,000 (Approx $200). After taxes, allowances and the ‘almighty bus pass’, INR 8,200 ($120) hit my bank account every month. Within the first few months, I applied for my very first credit card, which had a limit of INR 25,000 (~$350). Less than 6 months into my job, I was spending more money than I was making. Thanks to the credit, I was consistently overspending my salary and unable to pay back my monthly spends. Every month after my salary hit my account, I had to pay up interest, late fees, and then the minimum payable amount so I could carry forward the balance due till next month. I needed to fix something.

The superpower one needs to be able to navigate around saving is the “Big Bad B” for “Budgeting”. It may seem scary or annoying, but it really is Effective Spending.

Maintaining a budget requires having a big picture view on what your regular expenses are, and sticking to them. Most people (unlike me in 2004) who are on the road to financial independence have simply learnt this step very well.

Not being able to live within your means and balance your income versus your expenses is like rowing a leaking boat — You are going to drown one day.

Like me back in the day, people are living beyond their means by way of excessive credit use (credit cards, loans, borrowing from friends / family). This had to stop and fortunately I learnt the right steps that anyone can follow to help guide them through this process.

First, you need to know where your income is really going and then divide that list into the two types of expenses — ‘ Needs’ and ‘ Wants ‘.

Needs include expenses that you have to plan for monthly without excuse. They are always non-negotiable and defaulting on Needs implies lowering your standard of living. Food, rent, utilities, groceries, recurring critical medication, transportation to work, loan/debt payments fall in this category.

Wants are expenses that are discretionary and optional. When we take the emotion out of it, it is not mandatory to be spending money on these purchases. They include travel, luxury purchases, entertainment, excess shoes & clothing, dining out, TV or magazine subscriptions. We all would like to be able to spend money on nicer purchases, but they are not mandatory. While working towards wealth creation, we should live within our means, and Wants should be managed to our income levels.

Here’s an example — Let’s assume I earn Rs 10,000, and my Needs total up to Rs 7,500 every month. The remaining Rs 2,500 is my discretionary cash, and what I do with that discretionary cash is key to creating wealth in the long run.

Like I used to do in 2004, one can choose to spend the remaining Rs 2,500 on nicer things (Wants) — like payments towards a new phone or fun weekend expenses. Another option could also be to use that discretionary cash to invest in myself or my future by either learning new skills, paying down some debt, or simply investing it into savings and other financial investments. This decision is fundamental to setting you up for long term success. It is definitely painful to watch friends going out or showing up with brand new toys, but remember, that is instant gratification and does not deliver any return in the long term.

It is really up to you — If you believe that ‘Life is Short’ and you want to live to your fullest today, then go ahead. No one can stop you. I did the same thing for an extended period of time in my career, and coming from my time in the entertainment industry (concerts & casinos), I respect that fully. However, don’t be surprised down the road when you realise you want to have more financial freedom and you can’t afford to do it.

Some of the biggest regrets and complaints I hear from my peers have resulted from a lack of timely financial planning

  • I want to start a business but I can’t stop working
  • I got laid off and I have these monthly expenses, now I’m struggling to manage
  • I want to quit the rat race or take some time off, but I can’t afford to
  • I want to switch my line / career, but starting from a lower pay isn’t sustainable

What has worked for me in the past is balancing the desire to have both long term investments AND fun in the short term. Over the years, I had gotten more disciplined at making the payments for my Needs as soon as I receive my income. I then set aside part of what’s left and ensured to move it to another account before I start spending on Wants.

In the example above, after I’ve cleared the 7500, I would keep aside 1500 and put it into a savings account that I can plan for (more on that in Step 3 below). The final 1000 becomes my play money that I can use for my Wants.

Note that 1500 is exactly 15% of my total income. That is a healthy percentage, and higher is obviously encouraged

This is pretty obvious, but I need to mention that increasing your income, and lowering your Needs is the secret to having greater discretionary cash. For example, finding alternate ways to exercise that don’t cost as much as a Gym membership (running, calisthenics, yoga). Or even cheaper entertainment (parties with friends at home, getting a library card), learning to cook to reduce food expenses and dining in (great way to host events and eat cleaner). These reductions do not have to be forever, just for a short while till you get your finances a little more organised.

That’s one reason I became a minimalist over the years. I’ve saved a ton of money with this process, and it’s made my life choices more flexible than I could have imagined.

However, you also need to be mindful of something called ‘Lifestyle Creep’. This happens when your standard of living rises as your discretionary cash / income rises.

Be careful not to start spending more money just because of higher income. You could ruin any progress you’ve made with being able to manage your budgeting. In the example above, 15% was my discretionary, and if I received a raise, I would start saving a little bit more now (maybe 20%) to help meet my financial goals faster. I have friends who make up to Rs 5 Lakhs (USD 7,000) a month and struggle financially because they haven’t done the necessary ground work before increasing their standards of living. They’ve invested in expensive real estate and nice cars, but when an emergency comes up, they are unable to suddenly drop expenses because they’ve committed to them for the long term.

As you can see, whether we earn Rs 10,000 per month or Rs 5 Lakhs, it’s about managing one’s outflow expenses that make a real difference. And what we do with the leftover discretionary cash will enable you to build wealth and create security. Having the right emergency funds and insurance (coming up in the final part later this week) will set you up a long way towards that goal.

With the intention of making this content a little more readable, I have split this into a third part which I will publish over the next 2 days.

I look forward to hearing your thoughts on whether this seems doable, or too hard. I’m happy to hear if anyone has tried but failed at budgeting before the next segment comes out too.


Originally published at .

Lokyatha is an education focused initiative to enable young adults to live better, more fruitful lives by delivering real world life skills.