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| Capitalstars Investment Advisor |
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 the 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 that 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 inflation, 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 inflation.
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 specific 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 as 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 difficult 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 practice 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 the small stuff
If you are an impulsive purchaser, you are probably not too particular about the small spending either. The ‘latte factor’ or small amounts spent on insignificant 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 the 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 a 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 spending.