Your primary financial objective should be to achieve freedom — a state where you do professional work because you want to, not because you have to! Most of you may be taking efforts to invest so that you can retire rich. But are you paying attention to your spending habits as well? In this article, we discuss about your spending decisions and its relevance to financial freedom. We also discuss how you can set up a process to moderate your spending habits and stay on the path to financial freedom.

Spend wise

You need to set up passive income streams to achieve financial freedom. Passive income refers to income that you can generate without continually working for it. Investment income is one such example. You need to save each month and optimally route the money into investments to build the required passive income. Your spending habits are, therefore, important, as savings is a function of your expenses.

Now, spending decisions are personal. You may believe that buying a home-theatre system is not as important as joining a professional development program. And it is difficult to argue which is better!

Your financial adviser can guide you on certain spending issues. If you have large credit card debts, your adviser can help you plan your repayment schedule or prioritise your debt repayments. But your adviser may not be of much help in telling you whether to buy an air-conditioner (AC) and if so, whether to buy a three-star or a four-star energy efficient AC.

Such decisions are not easy to make. Is the saving on energy costs more than the higher upfront cost for a 4-star AC? The answer would depend on energy prices and your usage of the AC, both of which are not easy to forecast! You should instead focus on high-value spending- trying to bargain-hunt when you buy a car or a house. Seek, if you must, advice on matters of high-value spending, but help yourself on matters relating to regular spending decisions.

Save first

To moderate any adverse effect that your lifestyle expenses can have on your financial freedom, first take out at least 10 per cent of your monthly income. This will be your savings each month. You should set up systematic investments (equity mutual funds, recurring deposits and so on) to channel your savings.

This means you have not more than 90 per cent of your post-tax income to spend each month. Your home loan repayment or rental cost will account for the maximum proportion of your total monthly expenses. While home loan is good leverage, structure your loan repayment such that it accounts for not more than 35 per cent of the total monthly income. This leaves you with 55 per cent of your income to spend on regular and occasional expenses.

If you are not disciplined in your spending habits, you should earmark envelopes for each expense at the beginning of the month. You may, for instance, decide to earmark Rs 7,500 towards groceries. This way, you can keep a check on your spending. The use of credit cards can upset this equation! So, beware.

You may require consumer durables to maintain a desired lifestyle. This would include products such as TV and washing machine. You should manage these expenses within your post-tax monthly income and windfalls, if any. Otherwise, set aside a portion of your monthly income for such spending and purchase when the accumulated amount is sizable.

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