What makes us Rich – Financial Plan or Habits?

Most of us think to become rich we need a financial plan or great advice or more earnings. Neither Plan, Advice nor more earnings cannot make us rich.

More we earn more we become unhappy. Most people who ar


e in the mid-40’s can well think about this – Most peoples earning have gone up at least by 20 times in 20 years since they started working. But how many are happy with 20 times increase in earnings.

So what can make us happy and rich?

There is a very famous book – Seven Habits of highly effective people by Steven Covey. The book talks about how habits can really help us grow our professional career. It’s 100% true. It is habits which make us become better at everything. If we don’t have the right habits, then whatever we do we will not be successful.

The habit of getting up early makes us do more in life – remember – ‘Early bird catches the worm”
The habit of doing 20 minutes exercise can keeps us fit for ever in life
The habit of right diet can keep us away from most illness

We don’t need a big plan to live health life or professionally successful career. Just the habit of doing the right thing every day.

Similarly, habits can make us Financially happy and successful. So, what are the habits that can help us become rich.

Habit 1: Treat your Saving A/c as Spending A/c and Keep only minimum balance

Look around your house. More than 50% of things you bought and lying around the house is not being used at all. You have not only wasted money, but they are making your house untidy as well.

Think about all the eating out you have done in the last one year – How many of them did you really enjoy. Many of them may lead to illness

How did that happen? All because of our impulsive nature. Can we overcome this? It’s impossible. So what can we do to cut down these unwanted expenses. Only habit of keeping minimum balance can help us. Stash away your money in Liquid Funds and whenever you need money just get it transferred to Spending Account just one day before you need the funds.

It may sound impractical. Like all habits the confidence will come only if we implement and start experiencing. It is not easy to implement a diet plan. It requires hard work.

Try this for 6 months and see how you are able to increase your savings!

Habit 2: Invest in 3 buckets

All our investments are driven by greed and fear. Either some agent has come and showed some unrealistic calculations on returns which appealed to our greed or someone scared us by saying that Higher education for children is going to be very costly. The fact may be that when the child grows up the education scenario may be completely different (There may not be any Brick and Mortar universities – every university must have gone online and offering free courses and companies not bothering about where their employees get their degree! They are happy to give a job as long as they can pass their internal exams).

Most financial product seller exploits our Fear and Greed behaviors and pushes us the financial products for investment.

To get rid of this – create a habit of Investing 3 buckets

Bucket 1 is for emergency needs.  Imagine your phone stops working or it is lost. Can we live without a phone for even 10 minutes. Or Imagine, your Fridge stops working –  we cannot live without it for more than a day. We have got used to so many gadgets in our life. If any gadget stop working we need money to replace them. It can cause us lot of stress.

So keep at least 4 months income in Bucket 1. Remember emergency can happen any time. So when emergency happens you should be able to withdraw the amount in 24 hours and also without having to lose any capital – the financial product that meets this criteria is Liquid Mutual Fund. So accumulate 4 months income in Liquid Mutual Fund. You may not get big returns from Liquid mutual fund, but you will be happy to note that you will also not lose money and you will get returns equal to Inflation to keep your money growing steadily.

Bucket 2: All of us go through life stages. Education, Work, Marriage, Kid(s), Home, Retire – As we go through these stages, we need to prepared for the immediate next stage. Our Next Stage is known and imminent. When we move from one stage to another, there is always a big expense coming up for certain. Plan this big expense for moving into next stage in life and start accumulating in Bucket 2. Since the next stage is likely to happen in 2-5 years – ideal Investment product for this bucket is Fixed Deposit or Debt mutual funds.

Bucket 3: Bucket 3 is for the last stage of our life, when we decide to stop working. In today’s economic environment, it is not possible to plan for retirement. It can happen any time, perhaps even tomorrow. Since we don’t know when we retire and how long we will live after retirement it becomes difficult for us to estimate how much we need for retirement. Here we make an attempt to simplify the estimate on how much you need for retirement.

It is estimated that all of us will live till 80 years of age.

Suppose someone is 40 years of age and wants to retire, he needs to have money for next 40 years. If his current Annual expenses are say Rs.6,00,000 he will need Rs.6 lakhs each for 40 years, which is Rs.2.4 Crore. What about inflation? Can he manage Inflation ? We don’t know the inflation figures for the next 40 years. But as long as he can earn returns on Rs.2.4 Crore, the returns earned will help him manage Inflation. So all he has to do is after retirement, ensure that the returns don’t go below inflation.

To clarify, let’s take another example.

Suppose someone is currently 50 and wants to retire, then he needs to have money for next 30 years. If current Annual expenses are Rs. 5 Lakh then for next 30 years – Rs.5 Lakh each would mean Rs.1.5 Crore.

So, whenever you want to stop work – just check if you have enough in Bucket 3 to help you manage expenses till you are 80 years. If you don’t have enough, then there is only one option – Go back to work and work till you fill that bucket enough.


We will discuss the rest in a subsequent article.