My elder kid just celebrated her 6th birthday in September. I asked her what she wanted as a gift and pat came the reply, “Hanna Montana pens”, “Hanna Montana bag”, “Hanna Montana pencil box” and what not !
The total dent to my salary for celebrating her birthday was 40% more than what I had planned for. Coming from a financial planner who does financial planning for clients, I had to fish out my calculator to make some alarming observations.
By the time my daughter celebrates her 20th birthday, the birthday celebrations will cost me Rs 53,000/- approx. assuming an inflation rate of 10%. And this does not even factor in the increase in cost of the expected birthday gifts year after year.
Thankfully for me, I follow goal based investing very diligently so spending money becomes easy for me.
Are you used to save first, spend later ?
In my normal dealings with clients, I have seldom come across a 30 year old investor who saves first and spends later. Most of them have been taken over by the latest gizmos and girls in town. Fine dining, immaculate dressing and weekend splurging are very common with young investors (or spenders ?).
Saving is an agenda in which people are least interested in, spending money is the latest fashion. Splurging and spending money can lead people into huge debts (credit card debts for example).
The Western countries live their life style on credit and it’s a matter of time before we live on credit too. Everyone knows what the lack of savings and spending on credit did to the global economy in 2008.
Young investors need to understand why saving is important for them.
The average spender:
- does not have money to last him 6 months if he/she were to be laid off
- does not possess basic life insurance for his family
- does not plan for down payment of a home/asset he wants to buy
- yet, he spends first and saves later.
Concepts like budgeting, financial planning and goal based investing will stream line the spenders finances and only help him spend more ! That is because once spenders get into goal based investing, they begin to save for whatever they wish to buy in the future – its just that the process of saving money for a future product becomes planned and disciplined and in that process investors begin to appreciate their wants and needs better.
To exemplify, if a youngster wants to purchase an iPhone – he should set it as a financial goal, save for it and purchase it when the time comes. This still qualifies as splurging or spending money, but in a planned way.
It’s a tad funny – our parents stressed themselves to save money for us. Little by little they saved money for their future but they invested mostly in debt instruments. And here we are, helping splurging make a comeback. Maybe its time to go back to our parents and learn the basic lessons in money management !
Wow, excellent article. This is so true!
Few years back, I read the book “Rich Dad, Poor Dad” by Robert Kiyoski. In-there, the author has used terminologies like “liability” and “asset”. Throughout the book he stresses on “making assets and letting the return on the assets pay for the liabilities”. It took me almost half my life to learn this basic math of financial planning. Isn’t this common sense? I strongly feel that such basic financial education should be taught in schools. Hopefully one day!
I am taking away lot of advice from this blog of yours. I like your advice on goal-based investing. You have made a lovely analogy between “spending money” and “latest fashion”. This is so true!
It is probably time to go back and learn from our parents basic lessons of money management. Seems like, basic lessons are the toughest to grasp!
@D. Bahroos, Thanks for staying tuned in. Yes, you are right – rich people make their money work for them and generate more money. Poor middle class people take a huge home loan, add a few personal loans and credit card loans; spend more and save less and never get richer !
I strongly feel about your statement that Financial Management should be taught in schools. It’s a must.
Kapil Sibal should be thinking about it now !
Also, our parents were a lot conservative than us and there were few options you could blow your money away at – these days, earning money (BPOs ?) is quick and every 2nd the next ad on TV is about a cell phone. So we only know why consumerism is the way it is today.
Costs are increaisng like anything. even with some focussed planning, I always overshoot my budget. I think we now need to force ourselves to invest the day we get our salaries.
Wonder how people who r in business and get moey randomly manage money.
@Amol, Its a challenge no doubt ! I think SIPs of Mutual Funds are the best bet for small investors who want to get into disciplined investing. If we leave it to accumulate money to invest one day, consumerism might get the better of us !
Right about debts. They are bad – my opinion is that personal loans are the worst. Bad than credit cards debt. Home loans are better in any case. the West went down on its knees becaouse of complex financial products and I hope everyone learns from it.
@Jalal, We surely have learnt from it ! Both personal loans and credit cards loans are a strict NO NO. If you have them, close them today !
@Radhey,
Excellent article, thanks for giving your personal example once again. I always save before i spend. Even though i save over 50% of my salary i must admit that i do not wisely invest the same.