Financial independence: Luck or habit? | The Daily Star
12:00 AM, March 11, 2019 / LAST MODIFIED: 12:19 PM, March 11, 2019

Financial independence: Luck or habit?

With 12.9 percent of our population still living in extreme poverty and nearly 10 percent of the global population living below the lower poverty line, financial independence is a distant dream for hundreds of millions of people around the world. For the poor, financial struggle in everything they do is a given. But even for middle-class families, pecuniary hardship is a constant companion.

In such a situation, financial independence is seen as a mythical goldmine that is never attainable unless you win a lottery, marry into wealth or get adopted by rich parents. Of course, these options rely much more on luck than targeted planning. Therefore, most people tend to be fatalistic when it comes to attempting financial independence on their own—that is, they believe it is beyond their physical ability to get out of hand-to-mouth living and, as such, they accept the continuing vicious cycle of poverty and hardship from generation to generation.

However, extreme poverty has been on the decline globally over the last three decades according to the World Bank and many countries, including Bangladesh, are well on their way to eradicate extreme poverty by 2025. That is a welcome relief, but that still does not say anything about the financial independence of anyone with a modest income (those who are not in extreme poverty and have the capacity to save) because such independence does not come from monetary compensation earned through physical and intellectual labour but from passive incomes from one's savings and assets. This is where luck gives way to habits.

Every once in a while, we come across news about celebrities who die a pauper even though they earned millions during their lifetimes. Certainly, luck was on their side when it came to making a great living but their profligate lifestyle drove them into bankruptcy within their lifetimes. Here, habit—or rather bad habits—had more to do with their misfortune than luck.

On the other hand, there are plenty of examples where we see people of modest means end up reasonably well-off only through strict financial discipline—living below their means and always saving a part of their income in all situations. These people then invest such savings in high-interest bearing deposits, dividend-paying stocks or real-estate properties earning rent. Once you do that, you have passive income to supplement your active income and sooner or later you reach a point where your passive income is more than your disposable needs or living expenses. That is when you reach financial independence which is more a function of expenditure habits than luck. But as with any preaching, it is easier said than done—mostly because we are usually bad at saving as we keep spending more and more in pace, or sometimes even outpacing our active incomes, that is, earnings from our own labour.

Most people believe in instant gratification and if our active incomes allow it then we raise our standard of living to satisfy our comforts and pleasures. However, the habit that has served many successful and financially independent people well is forcing oneself to discipline one's needs to the essentials and opting for delayed gratification when it comes to non-essential comforts and pleasures of life. Financial coaches say that one should always plan to live on at most half their active income, save at least a quarter, and keep the rest for meeting periodic expenses such as clothes and household items, income-tax obligations, medical expenses or other unforeseen expenses. In other words, forming a habit of seeing only half or less of your active income as disposable income is the proven key to financial independence. This is not easy to do when we have so much temptation before our eyes every time we turn on the TV or our phones and get hit by alluring advertisements or walk by a store displaying their glittery wares every day. Then there is the peer pressure of colleagues, neighbours, friends and children's friends that we often succumb to taking the vacation that everyone else is taking, or buying an extra fridge or TV because every other family is doing the same.

Standing up to peer pressure can be especially difficult when your children beg for the next Game Boy because all the other kids have it. Making a habit not to succumb to constant pressures on such unplanned expenses and sticking to essentials and choosing to opt for delayed gratification—and that too only when passive incomes allow such pleasures—are the ways to incremental financial independence. Once these simple rules are made second nature through practice, the seemingly impossible dream of financial independence can be gradually achieved by anyone. On the other hand, spending on lottery tickets and dating rich consorts may seem like a sure-shot means of coming into wealth quickly but the odds of that are worse than the odds of getting hit by a bus as you cross the street next time.

Habibullah N Karim is an author, policy activist, investor and serial entrepreneur. He is a founder and former president of BASIS and founder/CEO of Technohaven Company Ltd. Email:

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