There’s no denying that we’re living in an age of instant gratification. We’re constantly told to live in the moment without a thought of tomorrow. The problem is, tomorrow always comes and we’re increasingly less prepared for it. Retirement savings, for instance, are falling by the wayside. While we all imagine our golden years to be just that golden, this requires long-term planning and foresight. Every day, we face tempting opportunities to spend money. A sea of indulgences can distract you from investing for your future. ‘Buy now!; Pay after one year!’ Don’t pay interest for six months! Everyone everywhere is urging you to spend, spend, spend. I’ve even seen an advertisement ‘Spend now, pay later!’ in the newspaper. But every money you spend now is a money in lost investment opportunities that could have grown a lot more in the long run.
In my work with younger clients, that’s one of the main conflicts I see: The desire to prepare for the future and save versus the impulse to live for the present and enjoy earnings now. People know that nobody is promised tomorrow, but they also don’t want to live out their retirement years with limited choices, or none at all.
So, how can people strike a successful balance between these seemingly competing desires? Based on my work with financial planning clients, here’s my six-step plan:
1 - Understand your cash flow
I’m going to make a bold statement here: Nothing will affect your financial future more than your ability to understand your household cash flows. If you want more money to save for the future or to spend now, you have to understand your current spending patterns and habits to achieve your goals. Check your spending every week that takes far less time than a monthly review, and it’s easier to catch instances you may have spent more than you planned. It’s easy to live lean for a week if you have overspent in a previous week.
2 - Learn to say ‘No’; by deciding on your ‘Yes’
The clearer you are about what you want to do in the short and long-term, the easier it is to make spending choices that you’ll be happy with when you look back at them. Before I marry a woman who became my wife, I used to feel deprived if we weren’t going out to eat often. On our honeymoon, I discovered that what I really wanted to do was to travel the world with her. Once that became the big yes, I wasn’t depriving myself if I didn’t go out to eat. If I did go out to eat, I was depriving myself of what I really wanted, which was to travel more. That single idea helped me change my habits entirely and build up the money, we needed to take a big trip every year.
3 - Limit your monthly expenses
I always talk about Money Past, Money Present and Money Future. Money Past is all of the money you’ve agreed to spend at the beginning of the month- things like rent, utilities, and EMIs. While buying a new car may not seem like a big deal if you think you can afford it, adding on a car loan to your Money Past comes with a major tradeoff: It limits your day-to-day spending (Money Present), and it cuts into your ability to save for the future as well (your Money Future). Be careful; I regularly see young couples adding to their Money Past bucket, limiting their present and future spending choices.
4 – Don’t Ignore Inflation
Inflation is a demon that comes down hard on anyone who ignores it. Since retirement is a long-term goal, it is important to understand the impact of inflation on your financial goals. Inflation is the rate, at which prices rise. It reduces purchasing power substantially.
Assuming seven per cent inflation, Rs 1,00,000 today will be worth Rs13,000 after 30 years. In simple terms, this means that things will become costlier and years later you will be able to buy much less with the same amount of money. Ignoring inflation means you will save much less than what you will need years down the line. If you spend Rs 50,000 every month at 30, you will need Rs 3.81 lakh a month at 60 assuming that prices rise at the rate of seven per cent every year. You have to invest in such a way that you beat inflation, that is, earn returns that are at least a couple of percentage points above the inflation rate.
5 - Start investing systematically
How is systematic investing a savings tip? It is, in fact, one of the best savings tips. It forces you to save more, by leaving a smaller surplus in your bank for discretionary spending. After a careful analysis of your expense, you should prepare your monthly budget as discussed earlier and set yourself a savings target. Based on your savings target, you should start a monthly systematic investing plan and set up an ECS with your bank account at the start of every month. That way you will prioritize long-term investment over discretionary spending. With a systematic investment plan over a long time horizon, you will benefit from the power of compounding of your investment returns and create wealth.
6 - Be patient, money doesn’t grow overnight
Many people who have recently started investing want immediate earning which is an incorrect approach. Returns are multiplied over a period of time. Don’t just think about how much money you can make in the present year; plan out how you can make money in the next 10- 20 years i.e. consider long-term options. And for that you should also know the difference between saving and investment. Savings are typically for small financial objectives to be met in short periods of time, say about 1-3 years! If you’re looking forward to buy a mobile phone or to go on a small domestic vacation in near future, saving might be a good option to meet such objectives. On the other hand, investing is typically a long-term plan for bigger financial goals. Once you start investing, you might feel overwhelmed in the first few months and could even make some minor mistakes. However, eventually, you’ll understand the entire concept.
Remember you are planning for future. It’s advisable to start investing at a young age, but it’s never too late. Savings are for the present and investments are for the future. Investments are made typically for bigger financial goals which may seem impossible now, but would be possible in the time to come if they are wisely planned today. Investing smartly is the key to meet such goals. To conclude, your dreams don’t follow inflation rates. It is recommended to save for small term goals, but investing simultaneously may make it simpler achieve your long-term dreams.
The author is head and founder of Mumbai-based financial advisory firm Money Mantra. He can be reached at email@example.com