Zooming into the future | Value Research For a young person who has just started to earn, how should consumption and savings be balanced?
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Zooming into the future

For a young person who has just started to earn, how should consumption and savings be balanced?

The public discussion about savings and investments in the media or social media is focused on the wrong thing. The most important thing always seems to be where to invest. Which is the hot stock right now? Which is the best mutual fund? And heaven forbid, which is the hottest crypto? To a young person who has just started earning and is casually looking at all this, the entire subject of investing appears to be essentially about choosing the best investment. This is utterly misleading. The real problem is that most people are not investing at all or investing too little. They start too late in life, sometimes they never start and when they do, then they invest too little.

Teaching the value of savings to young people is supposed to be a big part of financial literacy. However, some years back I came across something that gave me a 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 1.5 lakh. He had been dreaming of this for many years, as something he would do when he started earning. It's not an uncommon dream.

He wanted to know what was the fastest way to save up enough money to buy the bike. In response, he received some simple and 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 motorbike. 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. However, I actually 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 the way a young person would. In fact, he may not even want it then. So perhaps he should break the rules of good financial behaviour, and buy that bike right now with borrowed money, i.e., on an EMI.

Does that mean he shouldn't save? After all, it makes little sense to save while there are loans to be paid off. Even so, my idea is that such a person should also save a little bit. Even if it's just Rs 1,000 a month. Even if it's in something simple like a recurring deposit in his bank.

The reason is that at its heart, saving is not really about the arithmetic of returns and interest rates and so on. It's actually a way of thinking, a habit. A person who saves even a trivial sum of Rs 1,000 a month is a fundamentally different kind of person than one who spends everything.

What I'm saying 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. Once you feel the magic of compounding in your savings, when you realise that money just multiplies on its own, that personal experience is far more effective than any financial literacy class is going to be. Inevitably, the savings grow, people save more and it becomes a virtuous cycle.

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