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Make savings a target and not a residue
Make savings a target and not a residue

Spend less, save more and get financially fit

  • How should we then think about getting financially fit without compromising on our todays that much?

How to get rich. These four words tickle the aspirations of anybody who is not living in a cave having given up on maya or this world of illusion! The usual answers to this question deal with tips, some stocks, some real estate that is changing from agri to commercial very soon, some new crypto sure-shot deals. It is usually better to buy a lottery ticket than go down the path of somebody who is promising to make you rich in a very short time by doing very little work. A more mundane but possibly more useful question is this: how do I get financially fit? The answer is more boring than the exciting deals and just-in-time investing in a project that is closing soon. Financial fitness is about earning more, saving more, spending less and investing better. But we all struggle with living life today while planning for a future that we cannot experience. It is really difficult to resist instant gratification, especially for a generation that has grown up with relative plenty rather than the socialist supply and choice-starved regime of India in the 1970s and ’80s. How should we then think about getting financially fit without compromising on our todays that much? Let’s work with some rules that have survived the test of time.

Make savings a target and not a residue. The nudge to save comes from separating out savings from spending money and you can use whatever system that suits you to do this. Whether it is creating different bank accounts for different purposes or using some of the new fintech apps that promise to help you do the separation, the choice is yours. But the key to financial fitness is to move savings from what is left over to a target. Again, depending on your age, stage, goal distance and family situation, each person will target a different percentage of the take-home. Let’s assume that you are doing 20% of your take-home as your savings target and you move it out of the spending pool before you start the month’s spending, you will find that spendings shrink to fit what is left. And if there is more than you need for the month, you can indulge in some guilt-free spends. But the question remains, how can we save more? Try these two things.

One, rethink mental conditioning on events, celebrations and life stages. If a diamond company makes you believe that the size of the solitaire is directly proportionate to the love in the relationship, then the advertiser has won and you have lost. Begin noticing the push to spend more if you care enough. Rethink the relationship of spending more and believing that you have shown how much you value a relationship. I’m not talking about being cheap and whatsapping your mum to call you so that you can wish her a happy birthday while you are holidaying in London. This is about finding a special way to mark an important day. Sometimes it is not money or the value of the gift, sometimes it is just your time and attention. Sometimes indeed the marker of an event needs a big spend—then you do it. But don’t spend because you essentially want the other person to measure how much you care by the quantum of money you have just spent. If you catch yourself saying to work colleagues or friends—gosh that gift cost me a limb and more—rethink what you are doing.

Two, pay for brand you. This one is about peer pressure and our desire to be one with the group, however much we claim that we are lone rangers and totally don’t care about the world. We care so much that it hurts our finances. Rethink the need to buy a brand rather than a useful product. The question to ask is this: why will I pay 10 times more for stuff to carry somebody else’s name on my stuff? Dig deep down and you could find that the desire for particular words on your bag have to do with how others react when you wear or use it the first time. After that it is a routine bag, or shoe or watch. Spend on quality, and then spend a lot if it needs that much, but don’t waste your hard-earned money on stuff that may not be useful but “looks" good in others’ eyes.

The big leap comes next. You have saved more and have got a pool sitting in your savings account or liquid fund, but it remains a saving until you invest it. India does well on savings but poorly on investment. For your money to grow, you need to have in place a system rather than a periodic sudden rush of action. A system means that you know why you are investing. Just higher return is usually a recipe for disaster because you begin chasing last year’s winners. It is usually a good idea to break down this decision according to time—when do I want this money back and for what. And then according to the distance of the goal, decide on the appropriate products. The closer to today your need is, the lower the risk you can take. A system will force you to put discipline in your money life. And discipline in one part of life has a habit of spilling into others. Try it out—you will find that it works!

Monika Halan is consulting editor at Mint and writes on household finance, policy and regulation

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