Developing Sound Financial Habits - The Foundation of Building Wealth

I grew up in India. When I was a kid, my uncles used to visit us during summer vacations. During their visits, we used to have a good time. We used to go out to watch movies, eat out in restaurants, visit parks, zoos, temples and such.

My uncle Raghu was a little different. Aside from the fun, he would probe as to what kind of magazines I was reading regularly, whether I was even aware of Ren & Martin and what my vocabulary level was. He would even ask me some pointed questions in English Grammar, and General Knowledge. If you haven't guessed yet, English is not my first language.

He would emphasize and encourage that I regularly read magazines like "The Hindu" (English News Daily) , Reader's Digest and Frontline, to develop myself . I didn't cherish the idea. Not just because they were not interesting to read (at that young age), but they had certain words that required me to keep the dictionary by the side for ready reference. It effectively doubled the time required to learn and appreciate the content.

I used to feel uncomfortable and sometimes even intimidated, secretly hoping that he would return to his place sooner than later.

His constant prodding however had a surprisingly great side effect in me. Just before his visits, I used to pick up the magazines in question and come up to speed, lest he should find me dumb. It sure meant that I had to drop watching a few episodes of "Ramayan" or "Mahabharat" or to cut back on certain other magazines and activities, that were not totally "productive".

Although I didn't initially cherish the idea, I started learning certain new words, better grammar and pronunciation. I was able to spontaneously put them to better use in conversations at school. I got good grades in English. I got recognized and appreciated for the same. I even got my "Letters to the Editor" published. Seeing my name in print and that too in a National Daily gave me a kicker.

There was a certain momentum that started building. In due course, I started picking up and finish reading good books and magazines out of my own interest, rather than for uncle Raghu. I found reading good books to be a passion. My world view started changing dramatically. My perspective broadened and deepened.

I could clearly visualize and validate the benefits of learning English and Reading. I developed a habit out of reading. I haven't looked back. Today, I find it so hard to not read a good magazine or book in a given day atleast for 30 mins a day. I thank him, to this date for his prodding at that age.

You get the underlying message and the method. Good Habits are hard to learn and take time. Good Financial Habits take even more time. But with practice, they can be made to stick. Humans resist change, naturally and automatically. You have to overcome them. I found the following steps useful in developing good habits:

(a) Identify a good habit that you want to badly adopt and develop. Set it as your goal. Visualize the advantages of the Good habit. Be completely sold on it.
(b) Determine the time commitment needed for this good habit (Is it 15 mins or 30 mins daily or weekly?)
(c) Deeply analyze as to what bad habits can be kicked out to accommodate a good habit, or to make way for the time required. (Can you stop watching that favorite Soap of yours (free up 1/2 an hour a day), Can you curtail your daily pointless chit chat with that friend? (free up 15 mins a day)? Can you delegate that weekly shopping trip to your spouse? What are other things that you can cut back on?)
(d) Adopt the habit for at least 30 days continuously. Make efforts.
(e) Have a check point review on the 31st day. How did it go? Have you started to see some benefits or do you want more time to adapt this habit?

If you have seen benefits, by now you have already incorporated the habit in your life. Congrats!

If you haven't seen any and would like more time, continue with adopting the habit for some more time. Have another checkpoint. If after a few iterations, you don't develop this habit or don't have a passion for it, then it is OK to move on.

Here are some Good Financial Habits that form a solid foundation for Wealth. I compare these to good workouts for the physical body. Just as you can't build muscles without physical exercise, you can't build lasting wealth without building some good financial habits.

(1) Track your expenses and review them regularly. It can be on an excel sheet, or a fancy software, or plain old pencil and paper. But you should clearly know where your money goes every single month. Review your bank and credit card statements. That's the first step in finding out where you stand on Finances and spending. Even if you don't do a single thing about it, just make it a habit to watch it regularly. It'll cause magical changes in your spending patterns (for the better).

(2) Make it a habit save at least 25-40% of your net income every month (higher if you can). This may sound way higher than what the western authors recommend (which is typically in the 10-20% range). I will have a separate post on why you have to and how you can save higher in India. Automatically withdraw money from your savings account to a Fixed Deposit or Recurring Deposit or Systematic Investment Plan, every month. In India we commonly call this as "Standing Instructions" to the bank.

(3) Periodically assess your Net Worth and review against your Financial Plan. Every month just list your assets and liabilities and see how they stack up. Subtract Liabilities from Assets. That's your wealth.

Build a Financial Plan spanning short (1 year), medium (1-5 years) and long terms (> 5 years), that outlines where you want to be in terms of Net Worth, assets and liabilities. Don't feel intimated, just make up a simple list of assets and liabilities.

Compare your Net Worth against your Financial Plan, and see if you are on track. If not, make course corrections.

(4) Follow at least 1 or 2 good financial news magazines for 15-30 minutes a day. I tend to follow The Economic Times . But there are several other good ones. The Hindu Business Line, Financial Express to name a few. Choose the Online or Print Edition. Choose what suits your style. You may not get the meaning of all the news items and articles instantly. I personally found many articles to be Greek and Latin when I started. Over the course of time, I was able to get 99% of the information clearly, specially after I started investing. If you have to kick out reading some other magazines, please do. (Disclaimer: I don't work for, or own any stocks of any of the news magazines I recommend)

(5) Regularly follow good blogs on the subject. I personally like JD's blog (Get Rich Slowly) , Trent's (The Simple Dollar) , Ramit Sethi's ( I will teach you to be Rich). There are scores of other good blogs too. Visit them regularly. They are very enlightening and practical. If you use an RSS reader, please subscribe to their RSS Feeds without fail.

(6) Practice donating a small % of your income for charity or some good cause. This may be hard for some of us, but this is a must have habit for the truly wealthy. We'll have a separate blog on this topic later. If you can't start with a 5% goal, can you start with a 2% giveback to a charity or a good cause that aligns with your values?

As we know, poverty is widespread in India. There are people who are much worse off than those who can read this blog. It's easy to point fingers at Government or someone's respective destiny or Karma, but I think we all need to do our bit. It will simply feed your soul. It can only be experienced. I have made it a habit over the past few years, and my favorite cause is orphanages for children and old age homes. You can select your own cause.

(7) Read at least one Personal Finance or Self Improvement book in a month. I started my self-improvement journey with Dale Carnegie's "How to Win Friends and Influence People", and "How to stop worrying and start living". My personal finance favorites in no particular order are:, Robert Kiyosaki's "Rich Dad Poor Dad", David Bach's "The Automatic Millionaire" and David Ramsey's "The total Money Makeover".There are scores of others which we'll refer to later, but this is a good starting point. Create your own wish list of books to read, and go to the nearest library. If you have to pay to become a member, I would consider that a good investment (so long as you intend to develop a habit)

(8) Make it a habit to ruthlessly Simplify every aspect of your life: Contrary to popular perception the wealthy are very simple not just in their appearance and dressing, but in their mind. Review every aspect of your life critically and see what you can cut back on, to free up time, money and energy for what you truly want.

For e.g. Do you have too many bank accounts, and/or credit cards, and finding it hard to manage them? If so, can you cut them back to 1 or 2? Do you have too many cars and not using them, but paying for fuel, maintenance and insurance? Can you cut back to 1 ? Do you have too many books or clothes or CDs or DVDs that you have bought that you don't need or use any more? Can you donate a few to some who really need it?

(9) If you have kids, make it a habit to teach them the value of money and investment at as early an age, as you can. Lead by being an example yourself. Children don't do what you tell them to. They do what you do.

One of the best things you can do to your kids, is to educate them and make them financially responsible at an early age itself. We'll look at specific tools and techniques later in this blog.

(10) Make it a Habit to stay in the Present Moment and have fun. The goal of Personal Financial Management is to continuously improve your financial behavior, to let you reap the fruits of True Financial Freedom. It doesn't mean that you have to rob yourself of all fun things in life. It's not always about being miserly or delaying or denying gratification to a point where you lose the charm of life.

The goal is to have fun in a balanced manner. In such a way that your fun today doesn't become an obstacle to your freedom tomorrow. As you make progress, stop and thank yourself for making the progress and give yourself and your loved ones some rewards. Just ensure that you don't overspend or over do it!

What are good financial habits that you think are important to your building wealth? What would you add or delete from this list? What do you think?