Financial security is about being able to save and invest enough so you do not constantly rely on your salary to maintain your lifestyle. Usually, the idea is to reach this level of financial security by the time you have to retire.
Intuitively, saving more, being debt free, and investing regularly will get you there. However, these are not easy tasks to follow.
To get there you must tweak your behaviour a little too. Here is how.
Follow the Japanese 80% rule
The Japanese have a rule to eat up till they are 80% full rather than filling their stomachs 100%. This rule helps control over-eating and keeps health in check. Apply this to your lifestyle; don’t have a lifestyle that reflects 100% your ability to spend, rather restrict it to a maximum of 80%. You can do this for each spend, for example, if you are going to spend Rs 6 lakhs on a car- think again and try to look for a model closer to Rs 5 lakh.
This habit helps improve your ability to save and allows you to carry on maintaining the lifestyle you have much more comfortably when the regular income stops. Thus, making you feel financially secure.
The biggest mistake would be to take on a housing loan which requires 50% or more of your monthly income as monthly loan repayment. All your loan monthly repayment instalments put together should not exceed 20% or a maximum 25% of your salary.
Restrict your loan monthly repayments to 20% of your income
You may have several reasons for taking a loan – buying a car, house, paying for your ailing parent’s medical bills or even to fund an emergency home repair bill. The biggest mistake would be to take on a housing loan which requires 50% or more of your monthly income as monthly loan repayment. All your loan monthly repayment instalments put together should not exceed 20% or a maximum 25% of your salary. Only then will you have enough to save and spend on your lifestyle. If you have to take a loan to buy something, it means you can’t afford it, which brings us back to the Japanese 80% rule.
Invest for growing wealth
There is security in regular income investments like bonds and deposits, however, they will not help you grow your money. For wealth creation you have to pick investments which will compound return exponentially. This in turn requires you to become more financially aware and learn to take some risk in your investments. There are two behaviour traits you need to follow – start investing in growth assets like equity as early as possible so that you can use time to your advantage and secondly, force yourself to be regular.
Financial security may not seem important enough when you are dealing with pressures of everyday life and spends. However, if you start to think that you will not be earning regular monthly income forever and there could be a period of 20-25-30 years where you have to survive on what you have saved and accumulated, then you will realise it is important to strike a balance between your current consumption and future lifestyle.