I SPEND WAY TOO much time analyzing what went wrong and how to do better. Instead, I should probably focus more on what went right and how to do it again.
This tip came from a close friend, when I told him about my money mistakes. My friend’s logic? Despite my missteps, I must have done a few things right to offset the damage.
He had a good point. There are three things I did that paved my path to financial freedom. The rest simply fell into place. These are not silver bullets and I’m not swearing to their universal usefulness. But they were powerful enough to save my day.
1. Protect my human capital. After earning my undergraduate degree, I started as a software engineer at a midsized company. I soon learned that a career in software development wasn’t about a fixed set of knowledge and expertise. Thanks to rapid technological change, skills can quickly become obsolete, as my first supervisor told me repeatedly. I’m forever grateful to him.
For better or worse, I never had big career ambitions. Folks like me run the risk of getting too comfortable in their job. But thanks to my first supervisor’s insistence on the need for continuous learning, I was able to safeguard my employability and ensure rising income throughout my career.
2. Watch my cashflow. My mother was the family accountant. Each month, my father would give her a fixed amount to cover all household expenses. She handled all spending and noted each purchase in a journal. She’d periodically balance the books and, when things didn’t add up, she’d spend hours spotting the discrepancies.
I adopted the same technique. On payday, I’d go to the bank and withdraw a fixed amount of cash. Like my mother, I used a cashbox to keep the money and a notebook to track my expenses. Result: My bank account grew each month with the leftover money and, with every pay hike, my savings rate rose.
This low-tech method, alas, stopped working as checks and plastic took over. I needed to adapt. I opened a separate checking account with overdraft protection to manage my cashflow. Each month, I moved a fixed amount from my “salary account” to this new checking account. All my expenses—cash withdrawals, checks, utilities, credit card payments—came from this account.
Was it boring to monitor my cashflow regularly? It certainly wasn’t as fun as watching Seinfeld, but it wasn’t too dreadful, either. Was it time consuming? Surprisingly, it took little time. Was it useful? You bet.
With an accurate sense of my spending and saving, I could easily predict the impact of any big financial decision. On top of that, the mentality instilled by a monthly allowance protected me from insidious lifestyle inflation. Yes, my spending went up over time, but every increase was a deliberate decision. Most important, I could apply the 80/20 rule to my money. A fixed spending allowance forced me to funnel funds from unimportant expenses to those I cared about. This was the key to a frugal, yet fulfilling life.
3. Treat debt like a disease. Growing up in a middle-class family in India, I developed a lifelong abhorrence of debt. At an early age, I felt horror when I heard stories of people losing everything to private lenders. I saw borrowing as a sign of desperate helplessness. I vowed to never sell my future for today’s enjoyment.
My inflexible attitude had some merits. I dodged the trap of overspending with credit cards and avoided becoming a “revolver.” I never paid a penny on car loans, instead only buying vehicles that I could afford to purchase with cash. I took out a mortgage for a modest townhome in the suburbs, but only because I expected to pay it off in three years and becoming a homeowner saved me hundreds of dollars in rent.
My insecurity about debt eased after my second marriage. My new family needed a bigger place in a neighborhood where my stepdaughter could attend a good public school. I faced the reality of home prices inflated by the housing bubble of the mid-2000s. I could no longer afford the luxury of a debt-free life. In my late 30s, I reluctantly signed up for a 30-year mortgage.
It was painful to watch thousands of dollars go toward mortgage payments each month. I kept chipping away at the principal with extra payments. I refinanced a few times to lower the interest rate. I felt better when the annual imputed rent—the money I would pay if I were renting the house instead of owning it—exceeded my annual housing cost minus the principal payments. When I paid off the mortgage before its tenth anniversary, I felt a heavy burden lift from my shoulders.
Ridding myself of the mortgage may have been more of a psychological relief than a smart financial move. Still, my cash outflow shrank sharply after the mortgage was gone. I realized that, from now on, I could survive on a much smaller paycheck. That seeded the idea of dialing down my working hours—and started me down the path to early retirement.
Sanjib Saha is a software engineer by profession, but he’s now transitioning to early retirement. Self-taught in investments, he passed the Series 65 licensing exam as a non-industry candidate. Sanjib is passionate about raising financial literacy and enjoys helping others with their finances. Check out his earlier articles.