The secret is to spend what you have left after saving, instead of saving what you have left after spending.
Saving is the most important thing you can do to achieve financial freedom. I repeat, it is the most important thing. Because if you do not save, you cannot invest. If you cannot invest, then you cannot produce passive income. And if you do not produce passive income, then you can never be financially free.
The key steps in effective saving are:
1. Pay yourself first. This sounds cliché, but it is really important. It is the foundation. You have to pay yourself 10%-50% or more of your income every month if you want to become financially free.
How do you do it?
If you earn Rs. 70,000, then you have to save at least 10% of it every month. You have to take this 10%, i.e Rs 7000, as soon as you get your salary and put it in a different designated savings account which you will not touch, no matter what. You have to do this before you spend anything. You have to assume your monthly salary is Rs. 63,000 rather than Rs. 70,000.
2. The second step is to use the power of compounding. This basically means you do not touch the money for a long period,till the passive income you derive from it is substantial. Remember the rule of 72.
Rule of 72=72/rate of growth=no. of years need to double the initial investment.
For example: if rate of growth is 12% then it takes 72/12 for your investment to go from Rs. 1000 to Rs. 2000.
3. The way to do it is to invest it. The best investment for someone starting out doing this at a young age is to invest in an index fund or a well-managed active mutual fund. I also think that investing in a strategy called Dogs of the Nifty, which I have discussed in this post is probably even better. You can go to Dogs of the Dow to learn more about it. Use the S&P CNX Nifty as your index for the Dogs of the Dow strategy.
4. A very important advice is you should overcome the impulse to ‘have it right now’ through purchasing with a credit card or by borrowing from someone. This will make you go into debt and that is a death-blow for anybody who wants to be financially free.
5. The last piece of advice is to become aware of your financial freedom number. Once you are conscious of it, then you will find ways to cut this number by decreasing your expenses and increasing the assets that could produce passive income to make you financially free.