The Five Rules of Financial Freedom
Schools never teach us about financial freedom. Which is why the majority of people only understand them when they reach their forties or fifties. By then, it’s often too late, you miss the most important years of compounding and people regret wasting the important years of their lives. So if you’re in your twenties, knowing these five rules is very very important if you want to escape the rat race and achieve financial Independence.
Storytime
We will explain these rules with the help of a story, using the example of Rocky and Sunny, who are college friends. Both are 21 years old and studying at a top college. As soon as they complete their degrees, they land jobs at a major company that pays them a salary of Rs.30,000 per month.
Sunny always dreamed of owning his own home, driving to the office in his car, and living a luxurious life. With this job, he saw his dream coming true. So, he immediately bought a nice three-bedroom apartment in a good location on a loan. His family members and friends were very impressed because his dad had bought their house in his late forties, but Sunny had done it in his twenties. The only catch was that his home loan had a monthly EMI of Rs.12,000, which he had to pay off over 20 years. He then took out a loan for a nice car, which had a monthly EMI of Rs.6,000. Other expenses such as utilities, car fuel, and groceries totalled almost Rs.8,000 per month.
Sunny always loved eating at big hotels and attending parties, and now that he had a good job, he received many credit card offers from banks. He took some credit cards and started shopping without worry, thinking he had a secure job at a multinational company. He was living a great life, partying every weekend or going on trips. The only small problem was that he barely saved any money in his bank account.
On the other hand, his friend Rocky did not believe in taking loans. Even after Sunny took a home loan, Rocky controlled his expenses because he had read many personal finance books. He remembered a line that said:
“Spending money to show people how much money you have is the fastest way to have less money.”
This means spending money to impress others is the easiest way to become poor. Therefore, he rented a one-bedroom apartment in an average building far from the city centre to save on rent, as rents were high near his office. His rent was Rs.5,000 per month, and since he was renting, he didn’t have to pay many maintenance costs. His other expenses, including utilities, totalled Rs.8,000 per month because he ate reasonably good quality food and didn’t buy a car because he thought that cars are depreciating assets that lose value over time. Instead, he travelled to work by office bus. Now, Rocky also liked going out, but he first made a budget because he knew that if a budget isn’t planned in advance, expenses could spiral. So, he brought home-cooked meals to the office every day and decided to spend only ₹3000 per month on entertainment and shopping. Occasionally, he went to the movies or planned a trip to a hill station every two or three months.
Thus, his monthly expenses were ₹15,000, and he saved the remaining ₹15,000. He lived a humble and simple life. This brings to mind a quote from The Psychology of Money:
“Savings are the gap between your ego and your income.”
This means that the difference between what you earn and what you spend to impress others is your savings, a concept we’ll discuss further in this video.
So, Rocky planned to invest his savings in stocks and mutual funds. First, he set up a SIP (Systematic Investment Plan) of ₹5000, meaning this amount was automatically deducted from his salary and invested. With the remaining ₹10,000, he researched and bought stocks of good companies. Even after all these expenses, he had some extra money left over every month. Rocky also advised Sunny to save and invest, but Sunny always mocked him, saying, “Rocky, enjoy your life a little. If you don’t enjoy your youth, when will you? You’re so stingy. Look, I have a car and a house, what do you have?”
Due to their different mindsets, Rocky and Sunny eventually had a falling out and stopped talking to each other. Sunny was transferred to another department, so they didn’t see each other anymore. Years passed by, and Sunny made a lot of new friends at clubs and threw weekend parties at his house. Meanwhile, Rocky invested his savings in good stocks for the long term and also started an online business, hiring an employee. Setting up the online business required a lot of effort initially, but gradually, it stabilized. After paying the employee’s salary, he earned a profit of ₹10,000-₹15,000 from the business, which started growing over time. His income increased from various sources, but he didn’t increase his expenses. He continued to bring home-cooked meals to the office and traveled by office bus. Whenever he thought of increasing his expenses, he remembered that doing so would trap him in the rat race forever. He wanted to get out of this rat race as soon as possible, so he quietly continued his strategies, making calculations in his mind without others noticing.
Everyone thought he spent his free time playing computer games or reading boring books because his lifestyle seemed dull from a distance. Therefore, no one saw him as a role model; instead, they copied Sunny’s lifestyle. Almost a decade passed this way. Then a global recession hit, affecting the entire country. People stopped shopping, and the company where Rocky and Sunny worked started struggling. To survive, the company had to lay off 500 employees, including Sunny and Rocky. Both were shocked because no one likes to be fired. However, Rocky wasn’t too worried because he had always planned ahead. He had emergency funds, received dividend income from various companies, and had his online business running.
On the other hand, Sunny was devastated by the layoff. He had never considered such a situation. He always believed his job was secure because that’s what he had heard growing up. With the layoff, the bank started chasing him for his home and car loan payments. He still had half of his 20-year home loan to pay off and two years left on his car loan. His friends, who he thought were close, revealed their true colors. During this tough time, he had to borrow money from relatives and his family to survive, but that couldn’t last forever. Finally, he decided to sell his car. Due to the recession, the market was down, and he had to sell the car at a low price. He used the money from the car sale to pay off his home loan EMI.
Just when he thought things couldn’t get worse, he received news that a family member had contracted coronavirus. Sunny had insurance, but it was provided by his company. Since he was laid off, the insurance was no longer valid. He had to sell his wife’s jewellery and use whatever little savings he had to cover medical expenses. Now, Sunny was completely broke and in a dire situation. He had to pay the home loan EMI every month, but he didn’t know when he would get another job as companies were laying off people and not hiring. Each day became a struggle, and he fell into depression, even contemplating suicide. He blamed life for being so unfair. During this time, Rocky called him and invited him over to his house. Since they were old friends, Sunny agreed to go.
Rocky learned about Sunny’s poor condition from others and called him over. When they met, they talked about old times. Sunny first apologized to Rocky for the argument they had, explaining that he had acted impulsively. He then shared how bad his situation had become and how no one was helping him. Rocky reassured him, saying he had forgiven and forgotten about their argument a long time ago, knowing Sunny was a good person at heart.
Friends, here’s a bonus rule for you: in the world, there are many poor and arrogant people whose ego is bigger than their bank balance. Don’t waste your time seeking revenge on such people. Life will teach them humility on its own, and you’ll have the opportunity to add salt to their wounds if necessary. Rocky then told Sunny, “Look, my friend, I am planning to retire early and travel the world with my wife. I need a trustworthy person to manage my online business while I’m away. I know you are sincere in your work, so I’m thinking of offering you a monthly salary of ₹15,000.”
Sunny was delighted and relieved, as this would ease his worries about the home loan and debt collectors. However, he was also shocked by how quickly Rocky could retire, considering they were both just 28 years old. They had started their careers in similar ways, but now their financial conditions were worlds apart. From their lives, let’s draw some interesting and powerful lessons.
But before that, let me share something interesting with all of you. We, Invest Mindset recently got published in an international magazine. Have a look: https://www.twinkl.co.in/blog/how-to-achieve-financial-freedom-we-ask-the-experts
Lessons from the story
Firstly, Sunny’s poor financial condition was primarily due to mismanaged loans. Most people fail at loan management because schools teach us how to get good jobs and careers, but not how to manage loans. Consequently, financial freedom remains a distant dream for many. Interestingly, banks quickly offer credit cards to young adults in their early 20s as soon as they get a decent job. This sets a shopping standard and habits that last a lifetime. People start viewing loans as normal and spend their entire lives working for both their company and the banks.
Society, the government, and others promote this because they benefit from the debt trap. The government sees increased GDP, companies get more customers who buy on EMI, and banks earn interest from loans. However, this debt trap is detrimental to your personal financial freedom. Taking loans goes against the power of compounding interest, which can destroy your financial life if not managed properly.
Once you escape the loan trap, the next question is how to use your money wisely. Some people argue that loans help control expenses, but this is a flawed approach. The right way is to control expenses with discipline. A simple formula is the 70-20-10 budgeting rule: 70% of your income for living expenses, 20% for investments like stocks or mutual funds, and 10% for entertainment. Gradually increase the investment portion, as Rocky did, investing 50% of his salary. This approach, known as the 50-40-10 rule, focuses on investment and can help you achieve financial freedom in about 10 years.
The third rule for financial freedom is understanding that while many middle-class people see stocks as risky due to unstable returns, they find their monthly salary from companies like Reliance or TCS stable. However, during recessions, companies often cut costs by laying off employees rather than reducing shareholder dividends. For instance, Microsoft increased its dividend rate by 10% during COVID-19 while laying off employees. This shows that shareholders often enjoy more financial security than employees.
The fourth rule is the power of compounding. Many people still delay investing because they don’t fully grasp its benefits. Financially smart people invest early and avoid loans, while financially poor people delay investing and take loans quickly. If you haven’t opened your Demat account yet, you can start investing for your financial freedom today.
The fifth rule is understanding the concept of financial freedom. In India, working until 50-60 years old is often seen as admirable, but true financial freedom is the ability to buy your time back. This concept is not widely known because it’s not visible. If you see someone with a new car, it’s easy to copy, but you can’t tell if someone is financially free just by looking at them. This is why most people end up copying visible wealth instead of achieving financial freedom.
The education system trains people to be good employees stuck in the rat race because that’s beneficial for the economy. Investors and business owners make up only 1% of the world, while the remaining 99% are employees. The choice is yours: which side do you want to be on?
If you want to achieve financial freedom quickly, then update your email on our newsletter. In addition to these five concepts, there are other important topics we’ll discuss, such as tax strategies used by the rich to pay minimal taxes, even while earning a lot. For example, Elon Musk, one of the richest people in the world, paid $0 in taxes in 2018. Conversely, middle-class people with lower salaries often pay higher taxes. We will also delve into how to enter the stock market, understand financial statements, read insurance policies, and more. These topics will help you on your journey to financial freedom, from mini-retirements to full financial independence with dividends.
Be sure to share it with your friends and family so they can become financially educated as well. Supporting each other on the journey to financial freedom is essential.
Thanks for your time, peace out!
Mowsin