Financial independence is a massive undertaking. It requires you to be constantly aware of your finances and to be able to adjust as needed should your finances ever take a hit or the economy goes into recession. There are many habits to break and habits to create, but these 7 habit will help you get rich.
Here are 7 habits that will set you on the path towards financial independence.
FIRE-ish’s 7 Habits
Figure out your Net Worth
The absolute starting point on anyone’s journey to Financial Independence. This can be a little depressing (I nearly had a heart attack when I first did mine) when you do it for the first time. A lot of people are in the negative due to consumer debt on credit cards, car loans or mortgages.
For those who do not know or have never calculated your Net Worth, this is the sum of your total assets minus your total liabilities. It is not very difficult to do, but can be a little time consuming if you have a lot of assets and liabilities.
Net worth is the starting point because tracking your net worth is essential to both figuring out what you need to retire and how close you are to reaching it. It can be done monthly or yearly, whichever you prefer. I personally will go month to month so that I can make any financial adjustments if needed.
Track your money
You should track all the ins and outs. Very easy to track how much comes in because that is the good part! Look at every cent that arrives into your account so you know exactly what you can and should be saving.
More importantly, you need to record every single thing you spend. At least for a few months. No matter how small the amount, keep a record. How can you figure out how much you can save when you have no idea how much you are actually spending.
Make a monthly report
Tabulate all your expenses at the end of each month and break it down into specific categories such as Necessary and Discretionary expenses, which can be further subdivided. I like to separate out each necessary expense rather than combine any. That way, you can figure out where you can improve or search for new deals. The discretionary expense categories are separated into things like bars/restaurants, entertainment, travel, etc. These categories allow you to figure out where the most money goes, and you can figure out if you are alright with the amount you spend on each category. If not, you can cut back in the areas where you are spending too much.
If you know exactly what you spend, you’ll rarely be surprised at the end of each month. There are a few exceptions when there will be unexpected expenses but these are rarities.
Over analyse every purchase
How happy are you to spend money on this thing? How happy will this thing make me? Are you buying something for the sake of buying it, to make yourself happy or to portray a certain lifestyle?
Keeping up with a lifestyle by trying to appear richer than you are, to impress people by spending money is ridiculous. NEVER spend more money than you earn to just appear rich.
Does spending on something bring you closer to your goal? Financial Independence is my aim, spending unnecessarily is against my ultimate goal so I am aiming to reduce spending as much as possible.
A question I like to ask, “If I wasn’t working, would I still want to spend money on this item?” It makes you think long and hard about whether the expense is worth it.
Make a chart
Plot your income and expenditure each month. You will be able to see your spending go down, and maybe your income go up. Either way, the difference between income and expenditure should be your savings. Your aim is to increase this gap over time, therefore your savings should increase.
Ask what does the item really cost you?
Calculate the cost of the item based on how many hours you need to work to pay for this. Is it worth 3 hours of your life to buy something? It might help you be more frugal and therefore increase your savings.
Perhaps calculate based on the opportunity cost that was missed because you could have invested that money instead of a once off purchase. What would it have compounded to in 10 years? Plug in the numbers here and find out. You can see how much my daily diet coke cost me here and it made me think twice!
Learn to invest
Saving is only the first part of building your wealth. Once you have paid off your debt, the savings should be put to work. Learn about investing. Learn about ways to earn passive income. Invest in low cost mutual funds and enjoy up to 12% annualised returns* on your investment.
There you have it, my 7 habits to get rich and 7 habits you should get into as soon as you can!
*Based off historical data for S&P 500 tracker. It is not a marker for future returns.