Teaching the value of saving to young people is supposed to be a big part of financial literacy. However, some time back I came across something that gave me fresh perspective on the psychology of savings among those who have just started earning a salary. There was this question that someone asked during a personal finance Q&A in a TV show. This young man had just started earning and he wanted some advice about what to do with his money. His greatest wish in the world was to buy a motorbike worth Rs one and a half lakhs. This was something he had been dreaming off for a long time, while he awaited the day he would get his first job.
He wanted to know what was the fastest way to save up enough money to buy the bike. He got some straightforward sensible advice complete with detailed calculations about how much he should save and what the returns would be and when he would be able to buy the bike. As a conservative investment advisor, I should have concurred with this approach. Postponement of wish-fulfilment is supposed to be a cornerstone of good financial behaviour. But I found myself thinking that if he starts saving now, then he'd probably be 30 by the time he gets to buy it and that might be just too old to enjoy riding that bike. He may not want it then. So maybe, he should break the rules, borrow and buy that bike right now.
Does that mean he shouldn't save? After all it makes little sense to save while there are loans to be paid off. My idea is that he should also save a little bit. Even if it's just ₹500 a month. Even if it's in something like a vanilla recurring deposit.
You see, saving is actually not about the arithmetic of returns and interest rates and so on. It's actually about a way of thinking, a habit. A person who saves a trivial sum of ₹500 a month is a fundamentally different kind of person than one who does not. It may not pass the test of correct financial advice, but it's probably better to spend on what you want, as long as you know that it's an indulgence, and at the same time, start getting into the habit of saving.
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