Procrastination is everywhere, just as much or probably more so when it comes to our personal finances. We get lazy to go to the bank, kickstart that mutual fund investment or buy the much needed insurance policy. And if we have been considerate enough to start investments, we get laid-back about tracking and reviewing them. Savings are really not so much a function of how much we earn. ‘Start small’ is advice given by many, many financial planners.
If you are just not saving up, know that it is not because you have a low salary. Poor spending habits, flawed notions about investing, or plain ignorance and laziness are more likely to be the reasons you are unable to build a big corpus. Take a look at these nine scenarios that are causing hindrance to your amassing a corpus, along with how you should tackle these.
1. You buy depreciating assets
A depreciating asset is one which reduces in value over time. Even if you resell it, it will be for a sum that is lesser than the purchase price. So if you are buying something that doesn’t help your money grow, you are essentially just spending, not investing. If you think you are putting your money to good use while buying cars, bikes, laptops, furniture or expensive smartphones, you are not unless these are essential for your career.
What to do
Buy an asset that grows in value over time, say, a house, gold or stocks, and you will be saving. While you can’t do without some essentials like a vehicle or phone, try not to take a loan for these or buy them for an extravagant amount. A loan will simply increase the purchase price without contributing to your net worth.
2. You choose the wrong investing instruments
If you believe you are saving by keeping your money in a bank account or a recurring deposit, or buying a traditional insurance plan, you would be wrong. If your money fails to grow at a pace that does not beat infl ation, you are, in fact, eroding your wealth over time, not saving it. Secondly, if you know that the money is easily available to you for spending, say, in a bank account or at home, you will probably use it.
What to do
One, do not keep your money idling in a bank account or as cash at home. Two, make sure it is invested in an instrument that will help it grow faster than inflation of 6-7%. As per your asset allocation, spread it out among equity, debt and real estate, whose higher returns can beat infl ation.
3. You make impulse purchases
If you run your household without a budget, shop without a list, or indulge in retail therapy (shopping to improve your mood), you are probably falling victim to impulsive purchases. Be it the online buying sprees or shopping at malls, you are reinforcing the spending habit.
What to do
Set your financial goals, with a specifi c goal value and time horizon, and invest in line with these. If you know you have to keep aside a certain sum each month for your goals, and have to run the household with the remaining amount, your impulsive purchases will come down automatically.
4. You treat your wants as needs
One of the essentials of budgeting is to be able to distinguish between wants and needs. While needs include the basics of existence, such has housing, food, health care, transportation and utilities, wants would comprise travel, eating out, entertainment and branded purchases, among others. While some might consider it a subjective choice, with one person’s wants being another’s needs, it is not too diffi cult to segregate these depending on your income. If you confuse the two, your budget will go haywire and you will have little left to save or invest.
What to do
A good way to keep your wants separate from your needs is to follow the 50-30-20 rule of budgeting. Here, 50% of income should be kept for your needs, 30% for wants, and the remaining 20% should be saved and invested. If you practise this right from the time you start earning, you will never have an excuse for not saving, whatever your salary level.
5. You don’t care about small stuff
If you are an impulsive purchaser, you are probably not too particular about the small spends either. The ‘latte factor’ or small amounts spent on insignifi cant things can impact your savings in a big way. Whether it’s a Rs 20 bottle of Coke every other day, the small toys your kid pesters you for, or your daily dose of snacks in office, these seemingly small spends can help you build a huge corpus over the years. So if you were to invest Rs 500 that you spend on snacks every month, you would build a corpus of Rs 5 lakh over a period 20 years at 12% rate of return.
What to do
The first step is to track your spending even if it is Rs 10 a day. Once you identify the source of expenditure, you can cut it down. You could also try to fix an amount you’d like to keep for such spends in your budget so that you can satisfy your craving without overshooting your spends.
6. You don’t make any financial goals
A simple reason you are unable to save is that you are an indiscriminate spender. This also implies that you are working without a budget or do not plan for the future. So when you need funds for your financial goals, be it a small function for your child, his grand wedding, or even your own retirement, you will be left floundering. Consequently, you will either have to take an expensive personal loan, borrow from friends or family, or scrape up the amount by selling your assets.
What to do
Since you are not self-motivated to save, you will need to incentivise it by setting financial goals, both for the short and long term. Even if the goal is as small as taking a short vacation or buying your child a bike, get into the habit of planning and saving for it. Calculate the amount you are likely to need and the time after which you will need it, and then invest accordingly.
7. You don’t automate your investments
You may be earning enough and may have the intent to save, but are probably tempted to spend just because the money lying in your bank account is easily accessible, whether it’s through credit or debit cards.
What to do
The best way to overcome the temptation of spending is to automate your investments. This means that the amount you want to save leaves your account as soon as the salary is credited in it. Give standing instructions and ECS (electronic clearing system) mandate to the bank regarding your investments, be it mutual fund SIPs or a recurring deposit. You could also automate the full payment of your credit card bill, which means you will not be tempted to roll over your dues. This will ensure that you are saving before you spend.
8. You finance your lifestyle with loans
As opposed to Baby Boomers and Gen X, who primarily took loans to build assets and fund their needs, millennials are not hampered by low salaries to fi nance their entire lifestyles through debt. Armed with credit cards, and personal, vehicle or home loans, and fuelled by the fear of missing out, they spend relentlessly not only on their needs, but wants as well. If you too have the millennial mindset, it’s unlikely you are saving much, putting it off for a random day in the distant future.
What to do
Distinguish between good and bad debt, where the former can help you build assets, while the latter is only for depreciating assets or to fund your wants, with no returns. The most expensive among these, credit card debt and personal loans, should be avoided at all cost. Remember, all your loans, be it a home loan or personal loan, should combinedly not comprise more than 50% of your total income.
9. You love to keep up with the Joneses
A common reason people fail to save is that they blow up their wealth trying to keep up with their more affluent friends and families. Whether it is travelling to exotic foreign destinations every year, or living in houses bigger than they can afford, or buying branded products and fancier cars, they end up spending more than they earn. If you, too, are trying to live beyond your means, you are likely to fall into a debt trap and fail to achieve your financial goals.
What to do
No matter how much wealth you have, if you keep spending more than you earn, you will end up broke. An easy way to end the obsession with Joneses is to take the posts on social media with a pinch of salt. The rich friends you are trying to ape are probably on the verge of bankruptcy projecting a false image. If, instead of spending, you save, you are more likely to be as rich as those you are trying to keep up with.