“Spend less than you make. Always be saving something. Put it into a tax-deferred account. Over time, it will begin to amount to something. This is such a no-brainer!” — Charlie Munger
I have a friend who has been working for more than 5 years now with an above average salary. As of today, he has zero savings. Rather, he has a bank overdraft. Which basically means he spends more than he earns which is a recipe for disaster.
I have another friend, who saves his “above average” salary rigorously, lives with his parents and is on his way to financial freedom in a few years. He spends less than he earns and invests the surplus.
We will always find such people in all walks of life. And such people will never cease to exist.
Over the years, after i took charge of “money” management at home and personally, I have had a significant evolution in my thinking about money. I have slowly moved from a spender on luxuries to a spender on financial freedom. Yes, you got to pay for financial freedom. My thinking has largely evolved reading the greats such as Morgan Housel, Charlie Munger, Warren Buffet, Vishal Khandelwal etc.
Here are the key lessons i learnt over the years which has transformed the way i think about money –
- Do not chase money. Detach yourself from money. Detachment is necessary for peace. And peace is necessary for happiness.
- Money is only a tool to live a meaningful life. Now, how you define “meaningful” is upto you. Like someone has said:
Money is just a means to an end and not an end in itself.
- Treat money as an option. An option to live the way you want. An option to do things you have always wanted to do. An option to do nothing. An option which would increase your chances of survival in times of recession and depression.
- If you do not love what you are doing, seek financial freedom. It will give you the option needed. Cut unnecessary expenses, increase your savings rate. Try to diversify your sources of income. Morgan Housel quotes:
Your savings rate has a little to do with how much you earn, and a lot to do with how much you spend.
- Learn to live frugally. It is the best investment you’ll ever make. Focus on keep the standard of living constant throughout your life.
- There are two ways to get wealthy. Either you become an entrepreneur or you invest your earnings over longer periods of time. You will need specific skills if you want to be an entrepreneur. But surprisingly, the only skill you need as an investor is to learn to be patient. “Patience” is the only edge you will ever have as an investor over any other investor.
- Consider debt as your enemy. Even if it is interest free. Otherwise you will end up in the interest free obligation “trap” to make monthly payments for “n” number of months. Never let debt own a piece of your future. Never.
- Understand what exactly long-term is when it comes to equities. Invest in index funds. Stay invested for the longest periods of time possible. Focus on savings. Forget the returns. Learn to live with less. An iron rule of life is that if you want something nice, you have to pay for it. Be patient. Long term is very very long. Morgan housel quotes in this post:
Wealth has little to do with how much you earn and a lot to do with how you live.
- You know that you need a doctor to keep yourself healthy. But, you also need a financial advisor to keep your finances healthy. Invest in one. Make sure that you have a financial plan which lets you sleep peacefully at night.
- Understand risk. Study history. Most of the events will never get repeated. You need to learn to react to new unpredictable events likely to occur in the future. Morgan Housel (yes again) has written a wonderful article on risk. Here is a quote:
Do yourself a favor and learn about risk vicariously through others. Other people have screwed everything up that there is to screw up. Learn from their mistakes rather than figuring it out the hard way.
Jiddu Krishnamurti spent his life giving spiritual talks. In one famous moment, he asked the audience point-blank if they wanted to know his secret. He whispered, “You see, I don’t mind what happens.”
Change the way you think.