If I had known at the age of 30, that I would need Rs 50-60 lacs at the age of 50 to fund my two children’s college education and marriage, I would have calculated (at a compounded CAGR of 8%), I would need to save Rs 10,000 PM. So, I would have never started, because our household income at that time was only Rs 10,000 PM (which is equal to a salary of Rs 100,000* today). Sounds familiar? That is why most financial advisors don’t show you inflation adjusted returns or factor the eroding value of money over and above official inflation rate in areas like college fees and marriage expenses. Because if they do, no one will ever start saving. So how did me and my wife successfully achieve our life goals of two properties, premium college education and decent marriage at the age of 53. That is for another blog, but I want to focus on the core issue here : “Why is saving so difficult”
For most people, it starts with the basics: Lack of time and then the many hurdles on the way…
You don’t have the time to “sit and do” a proper goal based investment planning. Evaluate the zillion products out there and decide
Even saving 10-20% of income sounds difficult, because you need some cushion money to remain in your bank
The next increment or job is around the corner. So it is better to wait for some surplus to occur
In the short term, it no longer makes sense to save up money and spend later. 0% EMI or consumer finance or personal loans are the smartest way to buy / enjoy today and pay later, because, you are right, the value of money is eroding and prices are increasing every day.
And for medium to long term goals, there is no hurry. There is a whole life time ahead. We need to find an ideal saving product right?
What will you expect in an ideal saving product?
Manage and optimise the market risks (The risk – reward ratio)
Protect it against eroding value of money (official inflation rate++)
Protect it against your own aspirational spending habits (That one lac RD is maturing. Let us go on a vacation!)
Decent real growth, better than PF and Bank deposits, at least on par with passive index funds
Protection / Mitigation against bubble bursts and financial disasters
Flexibility to withdraw any amount any time for emergency, without any loss of principal or returns. (What if the markets are down when you need the money)
Flexibility to use the savings fully or partially any time for life time goals such as jewellery, property, college education and marriage (which is how wealth actually reaches the next generation)
Can there really be such an ideal product? After all, our expectations are quite contradictory. Like inflation-adjusted growth AND free from market risks. Any time redemption AND protection from our own aspirational spending habits. How can you ever find something that does two opposing things at the same time? That is why, we need more time. To sit and plan. Talk to experts. Make balanced compromises. Really?
But let us assume that such an ideal product (that does two or more opposing things at the same time) really exists. Assume it is just a click away. Do you think saving will then become easy?
Sorry brother / sister. It breaks my heart to break this truth. Saving is still not easy. Even when the ideal product, is just a click away. You know why?
The problem is that, there are so many goals, some of them really big, but there is very little surplus. We are forever trying to control our expenses and create that surplus in our account, so that we can save. But it never happens.
Except for the rich and the elite, for 95% of us, our aspirations are and will always be greater than our income. So how can we then ever find the surplus to save?
This is where it is important to understand the difference between Saving and Investment.
Investment is what we do with our surplus. But Saving is what we do to create that surplus in the first place. So the only way to Save, is to Save First. And Spend the Rest.
Saving should be done at the beginning of the month, before you start to spend, even when your expenses are greater than your income, even when your credit card balance is costing you 36% interest. Unless you save, how can you invest?
Whether you want to invest in land, house, flat, gold, jewellery, bonds, stocks or bitcoin or a mix of everything, will depend first on how much you save every month, may be in to a separate account that does not even have a debit card. It just takes a eMandate or a Standing Instruction to Save. And you can do that right now.
The uncomfortable truth is this. Saving is like walking, yoga, dieting or going to the gym. There are people who plan to do it tomorrow. And there are those who just do it.
Which one are you?
Takeaway: SAVING ≠ INVESTMENT. So just DO IT.
This is just one part of the Financial intelligence that we all need to steer our lives. There is so much more. So join our community and let us all learn from each other.
*Rs 10,000 PM in 1998 is equal to Rs 100,000 PM today based on the amount of Gold it can buy.