Saving is more difficult than investing

Saving is more difficult than investing

Whenever I have talked with groups of students expecting to get out of University, I am surprised at how any discussion around money quickly came down to “how can I double my money in the stock market?” and when I replied “I have no clue”, I never missed that expression on their face which basically shouted loudly  “what a waste of time!”.

Everyone is fascinated with stock markets and no one ever believes me when I tell them that, the one thing three decades in financial services has taught me is that, earning money legitimately was far more difficult than investing and still more challenging was to save money consistently to plan.

After all, why would I ever need to know about investing, if I didn’t about how to earn money and having earned it, how to save it. 

Keynesians say savings are what’s left over after one has spent living expenses out of income.

They almost make it seem as though there are three variables making up the savings equation. In reality, there is only one variable – consumption because of the other two, income is a constant and savings is a mere result. The point here is  – the only thing in our control is how much we consume or spend.

What’s however more important is that, merely earning more (that is assuming you can even manage to do that) does not assure higher savings either.

Which explains why about 75% in the USA live month to month, salary to salary with almost no savings. Isn’t that alarming for a country in which the average annual household earnings are about USD 50,000. (the equivalent of Rs 32.5 lakhs!).

But then why is it so difficult to save money? Savings is a result of us being able to push ahead the satisfaction from some of our wants or even needs, in order to hold back some of that hard-earned taxed money; possibly for some other need perceived by us to be of greater priority. I know of enough research out there which seems to show that saving does not come naturally to us.

And if there is to be one reason for this, I would say it’s because human beings are suckers for instant gratification – which is the reason we get pushed into impulsive buying and so many of us enjoy shopping for those branded clothes or the latest i Phone, knowing fully well that there is no place in our wardrobe and when the phone that I already own does fine by me.

Sadly, the thrill of shopping and the joy from those new possessions doesn’t last very long and we are back to wanting more ….. ending invariably in debt and penury.

It’s this realization which drew me towards minimalism.  I haven’t read a better expression of the essence of the effort involved in saving than what I recently did  @TheMinimalists   “Minimalism is not about deprivation; minimalism is about aligning your short-term actions with your long-term values” Click Here for theminimalists .com

Our challenge today is however, still worse – that we have taken to spending in anticipation of income (expected in the future – the uncertain future) – buy now pay later schemes, are pushed by every credit card issuer. There are so many I know, who are out of money even before they cross the 10th day after salary credit because most of it has gone to pay for loan and credit card installments.

Almost 65% of US earners habitually borrow on their credit cards (yes that’s cards in plural because many carry up to 12 credit cards in their wallets).

But why am I quoting US data points here? Because, we are fast discarding our conservative frugal Indian life styles and adopting US money habits!

Therefore, managing to save (more) will more likely than not, involve some lifestyle changes on our part.

For example, how about adopting a single colour wardrobe? Which means we get all our clothes in say a blue base. This will save on matching shoes, socks, neck ties and accessories for different colour schemes. This will apart from saving time spent on making those dressing choices when we are getting late to office; also save us a decent amount of money. How about picking up a hobby which could save you some money instead of spending more. Say if you were living away from your family; start cooking for yourself to save on hefty takeaway costs or invite friends over to save on restaurant bills. OR how about waiting to buy clothes in the “end of season sale”? Yes, of course this would mean wearing the last season’s fashion; which should be fine unless you are in show biz.

Therefore, saving is not about “not consuming” but quite to the contrary, is about “preserving the value in your money, for being consumed later” – ideally on goals carefully identified by you because they hold greater priority in the larger scheme of your life.

During my younger years most of my money was spent on keeping up with the Joneses – which meant not wanting to look inferior or even different than my peers in the elitist bank I worked for. Looking back, it all seems an utter waste of hard earned money.

So, what would I advise my younger self today?

Well it could be something even as extreme as changing my social environment to one that, does not drive me away from my financial independence. 

In those days when salaries were taxed heavily (at times up to 70%), employers would force you into accepting benefits instead of paying cash. Although this did save on taxes, it did so with two lethal side effects. First, one was forced into a level of life style which one could never afford if for some reason we were to lose our job and secondly, one had no hope of ever gaining financial independence because, there was no cash in the bank!

Whilst this arrangement worked fine till the mid to late 80’s; with globalisation it all fell apart after employers began abdicating their implied long-term commitments – basically, no more life time employment and assured retirement benefits. Even governments have now moved away from “defined benefits” to “defined contribution”. However, what with M & As and financial crises when even iconic institutions disappeared – today, none of the banks I worked for are around anymore!

Therefore, nowadays, no one in their right mind can believe that, their employer offers them any assurances for the future. Everyone of you is on your own. It was as long ago as 1995 that, I read this eye opener of a book by Dr Charles Handy wherein he warned that, we should actually plan and prepare for a 2nd career at the age of 40. (This book remains as relevant today: “The Empty Raincoat” and I would recommend it to every young person entering corporate life). Click Here to read more on The Empty Raincoat

So I say to all those new and aspiring corporate warriors – make financial independence your life mantra. It’s best to begin as soon as you guys are into your first job. The earlier the better because the cost for delaying can be debilitating !

Following from these life experiences; independence from employers became my top priority Life Goal and my favourite lifestyle rule has therefore, been “Don’t increase your living expenses unless you are sure you never have to bring them down in your life”.  Closely followed by “use debt most sparingly and never borrow on credit cards”.

So how did I go about it?

Well, it was at 32, that I was fortunate to work for a boss, who (unknown to him) also became my life planning mentor. Closely observing (after of course being forewarned by Dr. Charles Handy) the way he managed his finances made me soon realise that, financial independence was the only way to deal with the inherent uncertainty which had crept into my professional life and the main cause of stress in an otherwise blissful personal life. How I wish I had met him a few years earlier after I realised the cost of delaying my savings effort.

Well credit cards usage, debt management, cost of delayed savings and the need for financial independence are all important topics which deserve a page each in the future.

I approached the life planning process in three broad steps:

  • Where am I now?
  • Where do I want to get to?
  • How do I get there?

In order to know “where I am now” I needed the following :

  1. List of my Income per source
  2. List of my expenses per head
  3. Arrive at my cash and income surplus (hopefully, not shortfall)
  4. List of my assets
  5. Lists of my liabilities.
  6. Arrive at my Net Worth

For those who have never tried this before; let me forewarn you that, this will prove a test of your perseverance because gathering all the information and recording it in a systematic manner will most likely than not mean taking time off whatever else you are doing during your spare time.

Personally, I have found it convenient to manage all my financial activity around the Income Tax Calendar (Advance Tax, Self-Assessment, Return Filing, etc.).

You may find it useful to go through my earlier write-ups. Click Here to know; How does inflation harm you? ; How to tackle an uncertain future & Life planning is not all fluff

The only way to manage the uncertainty which is embedded in our future, is to ensure that, the above statements are reviewed and updated every year after you have filed your Income Tax Returns.

……. and to let you take that “Single Step” – I will leave behind a FREE Budgeting Excel Work book. CLICK HERE to download the (worksheets)

I am no expert of Excel so my work sheets are simple (devoid of any macro wizardry ) by default and not by design – therefore, if I can use them almost anyone can! Please go ahead, download and change them to suit your specific needs i.e. just in case you wish to incorporate more detail.

Coming next on this blog (lets say Part II of Budgeting): Why Budget at all ? Can I get a “financial picture” to begin the “Where you are” stage? Why and how should you automate the process of saving ? How to manage those dreaded shortfalls in liquidity ? and How can you prevent emergencies from throwing your savings plan out of gear?

Watch this space ……

10 Replies to “Saving is more difficult than investing”

  1. Very practical though tough to practice tips. With you kind permission, I may use some of the information during AWOKE India Foundation’s financial Awareness programs. Though saving rate is up to 50% in tier 3 n rural areas, its -10-20% in top metro cities. Unfortunately, in the end What brings them at par is poor financial management. A very relevant and thought provoking write up though I may differ on blue base wardrobe especially having changed from white to multicolored wardrobe post my wife coming into life. Thanks so much.

    1. Thanks.Please feel free to use the article for any non commercial use so long as it is reproduced entirely, unchanged and with credits.

  2. Rajan-this article is a’guide’for the young. I hope the young are NOT daydreaming that the state will take care of their needs when they are old!

  3. Every article in Your blog is a invaluable piece of advise to the millenials and young generation. Thank you for sharing Rajan Sir.

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