10 Simple Rules that Brought Me Financial

Nirvana
POSTED ON DECEMBER 4, 2013 // 22 COMMENTS

I was in Ahmedabad last week for my Art of

Investing Workshop (here’s the proof), and
met a few young executives – in their mid
30s – who had questions about how I have
managed my own financial life so well so far.

A couple of them were, in fact, amazed to

hear my story and told me that I have been
an exception.

“That’s not true!” I told them. “I have not done

anything special in my financial life that
anyone else cannot do.”

In fact, whatever I have done to bring myself to a stage of financial nirvana – if I may
use that term – I have done with the help of some simple rules on how I treated my
money over the years.

Now, while I am too young to dispel any life-changing advice on “how to be a financial
rockstar” or “how to remove all financial worries from you life”, I am happy to share
below 10 rules that have changed my life for the better over the past few years, and
how these can also benefit anyone who practices them with discipline and integrity.

Here are those 10 rules.

Rule #1. Save, Save, Save

Save at least 10% of your net take home pay during the first year of your career, 20% in
the second year, and so on.

Plan to increase it to 50% in five years. Saving more is always good, but 50% is a
number you must certainly target.

The best way to meet this target is to follow this simple equation of “Income – Saving =
Spending”. First save, then spend of what remains.
When people get amazed to know how I managed to get debt-free before I turned thirty-
three, please know that this formula helped me a lot.

(“Debt free before thirty three” can be a nice rhyme kids can be taught in primary
school)

Rule #2. Restrict EMIs

Never have your EMIs – on home loan plus car loan plus any other loan – more than
30% of your net take home pay. If you have extinguished this limit, don’t borrow any
more money.

The highest I ever went to was 40% after I bought my car in 2007, but brought it down
to under 30% after I repaid the car loan in 2008 from my savings.

Since 2011, when I repaid my entire home loan, EMIs have been 0% of my income, and
that has added to the confidence with which I am living my life.

Rule #3. Create Emergency Fund

Create an emergency fund that is at least 6 months of your household expenditure.
Keep this money in your bank account or in a liquid fund.

Don’t touch this money to pay for a new car’s down payment! This money would help
you when misfortune strikes in the form of a job loss or illness.

I had an emergency fund of 12 months when I decided to quit my job. Luckily, I did not
have to withdraw even a single rupee out of it. But just the thought that I had an
emergency fund brought me a lot of emotional comfort while making that life-changing
decision.

Rule #4. Buy Medical Insurance

Even if your company provides one, buy a personal medical insurance policy that will
cover you and your family even when you quit your job or are out of job.

I know the importance of having a medical insurance, as I benefited from it when my

daughter Kavya fell seriously ill when she was just two years of age. Not having a
medical insurance would have enhanced my trauma.
Rule #5. Buy Term Insurance
If you have dependents, buy term insurance.

How much? If you are 30-40 years of age, have 2-3 dependents, and have zero
liabilities, insure yourself for at least Rs 1 crore.

Also, if you are 30-40, have zero or less loan liabilities, and maintain good health, there
is a good probability of you surviving the next 30 years. So don’t get overboard with the
cover. A maximum of Rs 2 crore should be enough.

Rule #6. Pay off High Cost Loans

Try to avoid high interest loan like credit card or personal loan. But if you are
unfortunate enough to owe one, pay off as fast as you can.

As Charlie Munger says – “Once you get into debt, it’s hell to get out. Don’t let credit
card debt carry over. You can’t get ahead paying 18 percent.”

I have never borrowed a credit card or personal loan, as I know these are things that
could kill me financially.

Remember – If you wouldn’t buy something in cash, don’t buy just because you can use
a credit card or borrow a personal loan.

Rule #7. Never Borrow for Liabilities

Avoid paying interest on anything that loses value.

A car – especially a big one that you may not need but to show off – tops this list.
Electronic toys – mobiles, tablets, LCDs etc. – come next.

You may still buy a car (one car) on loan, but try to repay that loan as fast as possible.
Also, see to it that the EMI does not lead you to cross the 30% EMI-to-salary criteria.

Please remember – for whatever the banks will tell you, a loan would never bring you
peace of mind. Too much of it, in fact, can be a road to hell.

Rule #8. Repaying Home Loan

If you have an option of paying off your home loan versus investing that money, know
that it’s both a financial and an emotional decision.
Avoiding paying off a 6% interest (post-tax) home loan and instead sensibly investing
that money to earn 12-15% return is a good financial decision. On the other hand,
clearing the home loan instead of investing that money is a nice emotional decision.

I went by the latter when I was quitting my job, but you can choose to do the former.

Rule #9. Know the Priorities

Don’t invest in the stock market – directly or through mutual funds – till you have an
emergency fund, medical insurance, and term insurance in your kitty, and also till you
repay all high-interest debt.

In fact, don’t invest any money in the stock market that you may need in the next 1-2
years. If your stocks fall in this short period of time, your financial life may get
compromised.

Rule #10. It’s Not (Always) about the Money

While these rules will help you take better care of your money and financial life,
remember to not get too focused on these things that you lose out spending time on the
real joys of life.

As a wise man, or maybe a woman, once said, “No matter how hard you hug your
money, it never hugs back.”

What do you say?