How to save enough for the future without being a miser
28-Mar-2023 •Ashutosh Gupta
Our Value Research team has expanded rapidly in the last couple of years and a lot more twenty-somethings make up our workforce. Our office's breakout area - 'The Bailout' as we call it - is mostly buzzing with voices of excited youngsters huddled in animated conversations while they sip on their caffeine in windy Delhi mornings.
The other day, as I waited by the coffee machine to have my fill, I overheard this interesting conversation on saving and investing (what else!). Being the month of January, the discussion started with this tall, skinny youngster (who does some great work behind the camera) enquiring the others about the deductions and receipts they were filing with the finance team to save tax. They first chatted and ranted about taxes before the discussion took an interesting turn when this young girl, who joined the research team last year, proudly disclosed that she's been saving and investing more than 50 per cent of her take-home salary. Her statement drew different reactions - some were in awe, some looked at her with disbelief and a few others were simply curious to know where she was investing. But all of a sudden, the latest member of our design team, let's call her Rachna, declared, "Yaar main investing ki itni tension nahi leti. Kya main ameer marne ke liye paise ki bachat karoon?" (I don't make much effort to save. After all, what's the point in living a miserly life to die rich?) There was a momentary silence before the group burst into laughter. As I walked away, I could hear the discussion move to their struggles and successes with saving in their fading voices.
That conversation stayed with me for a while. As I mused over it, it only reaffirmed what we have come to understand about investors' attitude towards personal finance over the last two decades or so. Our association with the world of investing brings us in touch with hundreds of investors who share their anxieties, seek opinions or question our beliefs. These conversations reveal two very distinct mindsets - people, by nature, are either savers or spenders. For obvious reasons, I'll turn my attention to the latter. If you belong to this group, you might find Rachna's argument about 'dying rich' a clinching one to justify your spendthrift habits. There are two underlying presumptions that fuel this reasoning: one, dying rich is something bad and, therefore, avoidable; two, saving for your future will force you to live the life of a miser in the present. I would like to challenge both.
It's not about dying rich. It's about avoiding the possibility of living your winter years with an empty nest. Old-age poverty is a far worse outcome than leaving a legacy behind. Think about it. Secondly, saving for your future doesn't mean you have to live on a shoestring budget.
Agreed that humans are pleasure-seeking beings and pleasure lies in spending, not saving. But being methodical in your quest for gratification instead of being impulsive goes a long way. Moderation can be a very rewarding virtue.
When I look at the spending behaviours in my circle of reference, I find that much of the extravagance is simply a result of impulsive behaviour. While a thoughtful decision is one where you first weigh the pros and cons objectively and then decide, with impulsive spenders, it happens in reverse.
Disagree? Well, here's a thought experiment. Think about all the things you bought impulsively in the last two-three years. Have they turned out to be as useful/ helpful/valuable as you convinced yourself to be at the time of buying? Were they really needed or did your impulses get the better of you? Do this exercise earnestly. Hindsight can be a great teacher.
So, what's the way out? How do you deal with your impulses?
Well, in Greek mythology, King Odysseus asked his sailors to tie him to the mast of his ship to prevent him from heeding the fatal call of the sirens. You too need to find an anchor to prevent yourself from giving in. Different things work for different people. One of my shopaholic ex-colleagues started keeping a very restrictive limit on his credit card to prevent him from overspending. I'm also reminded of one of my old neighbours who would only go shopping with his wife. Being a more thoughtful spender, she would save him from going overboard. But I guess in today's age of buy-now-pay-later and online shopping, these are perhaps weak defences.
One of the methods that I have found effective in changing the mindset of a spender is the rather humble and simple bucket system. Most people baulk at the idea of a budget because it takes a lot of effort to prepare and maintain it. But here's a two-minute version which is easy to digest, simple to execute and can be on autopilot.
Create three very broad groupings from your monthly income.
Essentials: Most of us can easily come up with a reasonably good estimate of our essential living expenses. These include monthly rent, EMIs, daily travel, grocery, school fees and similar non-negotiable expenditure. This is bucket number one.
Savings: Aim to save 20 per cent of your salary every month. But if that seems difficult, start with at least 10 per cent.
Discretionary: This is your fun bucket! After carving out the first two, put all your remaining income here.
This is the same as the popular 50:30:20 rule. And the easiest way to put it into action is to have three different bank accounts, one each for essentials, savings and discretionary. Every month when you receive your salary, divide your money in these three buckets (bank accounts). Follow this simple technique and you're all set for the future! Meet your living expenses from the first account, create your SIPs from the second and use the third to spoil yourself. But promise not to steal from the first two buckets. If you are falling short of money, wait till next month. Let this be your proverbial mast. I have seen people (including members of my own family) tame their over-spending impulses by following this advice.
And there lie the beginnings of a financially secure future!
This story first appeared in the March 2023 issue of Mutual Fund Insight.
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