Trying to achieve more with less money can be a challenging proposition. Nobody will give you a bigger house by paying a lower-than-expected asking price. Nor will you have enough in your retirement fund if you don’t invest enough during your working years.
As for debt, doing more with less can be dangerous. Bankers and credit card lenders assault our senses with cheerleading messages about spending more. We are urged to take loans to buy goods that we might not have immediate need for with money that we do not currently have. The psychological benefits of being the new owner of goods and services are such that we ignore the fact that the bill will come to us one day. And, if we don’t have the money to pay the dues, the joy of being an owner can be quite short-lived. So much for doing more with less. We offer you three tips to keep in mind when trying to achieve more with less.
Be careful with leverage
The subprime crisis in the developed world is evidence that when we use leverage irresponsibly, it can have disastrous consequences.
Don’t incur debt for items that you will consume or which are perishable in nature. For instance, avoid taking a personal loan or using credit card debt to buy the hottest new cellphone. The cost of these goods will depreciate almost the moment you buy them. You may enjoy the holiday you took, but will have nothing of economic value to show for it when your bank comes calling, asking for its money back.
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Use debt to buy only those products that appreciate in value. For instance, taking a home loan to buy a house is desirable because in the long run, the house is expected to appreciate in value. In a worst-case scenario, at least you still have the house that can act as collateral and security against the loan that has been given to you.
You might also want to consider taking loans for activities and pursuits that will enhance your human value and earnings capacity. For instance, taking a loan for education or for acquiring a new skill that will stay with you for life and can improve your job prospects is also desirable.
Some things are absolutely essential because they are non-discretionary. You cannot avoid paying your child’s tuition fees, your parents’ health care bills, household utility bills or the EMI of your home loan. If you prioritize your expenditures, you can plan your financial goals and even achieve them. We can achieve what we rank as the most important things, even if we start out with measly resources to begin with. Without priorities, we might lose direction and might not like where we end up.
Don’t look for short cuts, there are none
There are no short cuts when it comes to creating personal wealth. Get-rich-quick schemes are just too good to be true and are most likely built on shaky foundations. The Madoff and Satyam scandals are the most recent high-profile evidence of this.
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Nobody creates wealth by spending a lot of money on consumption. So the first thing to keep in mind is to keep consumption in check and not take on debt to fuel your lifestyle.
Instead of consumption, you should be disciplined about investing regularly to create sources of income other than your salary or professional earnings. The truth is that our salary incomes will not be adequate to support us during all the phases of our lives.
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You will need alternative sources of income, such as rental, pension or investment incomes, to complement your savings from your working years to support all your needs across different phases of life, especially once you retire.
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Finally, you must keep a long-term perspective while thinking of finances. In finance, the fable of the tortoise versus the hare has a lot of relevance. A steady, even if slow, start can translate into something huge over a long period of time, as long as we are consistent and do not lose sight of our goals. Lack of focus and discipline, and overconfidence in our abilities that everything will work out because we hope it will are sure-fire ways of ending up in trouble.
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The author, along with Dhruv Agarwala, co-founded iTrust.in, a New Delhi-based financial advisory