Our ancestors, depending on an agrarian economy, had passed down some wisdom through the generations, which is largely lost on the modern world with modern non-agrarian economy.
Some of things I have heard about the ancient wisdom (Told by my elders):
1. Do not spend/waste everything you receive – They said it isn’t how much of Ghee (clarified butter) that goes through your hand that matters, it is how much that sticks to your hand that is of help to you, as that’s all you can take to your mouth. In other words, it doesn’t matter how much you earned and spent, it is only the amount you saved that matters.
In modern times, it is essential to save at least about 20% of your monthly income. This savings should be in addition to the Mortgage payments and Mandatory Retirement savings (PF, Superannuation etc).
2. Prepare for Crop Failure: Every once in a few years there will be a year or two where the crop will fail. It could be because of failure of Monsoon or some disease. If you aren’t prepared for it, you’ll go hungry. It doesn’t matter how big a property/assets you have, if you have not saved atleast a year’s worth of harvest for a bad year, you’ll fall on hard times.
In modern times, employed/Business folks put in their effort to reap the harvest in terms of their salary/profit. It is only the natural scheme of things that some time the harvest will fail for a while. The intelligent thing to do is to prepare for those days by keeping some buffer amounts to take care of bad days. Ideally 6 months to an year’s living expenses should be in liquid funds.
3. Size your House right: The house you choose to build should not cost more than 2years worth of household produce. If you can’t afford to build it within that, then wait for a day when you can afford to.
In modern time: the above rule can be modified slightly. These are days of high inflation and higher income growth. So, I think a fair measure would be to take your current net income (post tax), and plan to spend about 3 times of that for your house. So, if you have an income of about Rs.600,000 post tax income per year, the right amount to spend on a house is about Rs.18,00,000. Anything more is stretching yourself, and discounting your future cash-flow heavily. A certain recipe for landing yourself in trouble.
4. Be careful while borrowing money : Never borrow money, unless it is for buying and improving the land that gives you the income. The money you borrow should be repayable over a period of time, with the produce created by the deployment of the money. In olden days of low inflation, and repeated crop failures, people dreaded loans, and avoided it like plague.
In our times – In a career spanning about 25-35 years, one may go without much income for 2-3 years in the middle. So, the situation today is much better than the olden days of frequent crop failures (in a time span of 35 years, you’d could have 5-7 crop failures. Considering this, borrowing money today has become easier. Considering the higher inflation, loans have become desirable. However, there has to be prudence. One shouldn’t borrow more than what he can’t pay back within 7 years, with 30% of his income.
5. Hasige Iddhaste Kalu Chachu: Literally means – Spread your legs only as much as the bed permits. Do not overspend. If you are spending money by borrowing (credit cards, personal loans), then there is certainly something wrong with your lifestyle. Your expendable income should be the portion that remains after you have paid all bills, mortgages, rations and savings (minimum 20%). if you have any money left after that, it can be used for other expenses like hotels, holidays etc.