Expert advice

Oct 17, 2011,15.14 IST

A job change won't solve your money woes

By Suresh Sadagopan

There is  enough depressing news in the papers these days – national  and international. One persistent news that depresses me no end is how money is being wasted by our government.

One of those was the hundreds of crores being spent in Mumbai on roads and yet the roads are filled with potholes. Hold your breath now…  after being inundated with complaints about potholes, BMC awards contracts to the same contractors for makeover of those roads! 

Leakages abound in all government schemes like Public Distribution System, NREGS, government  schools and most other public welfare schemes, where siphoning of funds even top 50%, in some cases. Is government plugging the holes?

Nope, though it claims to do so. It just looks for sources to raise more revenue, when it first needs to plug the massive leakages. Coupled with it, government spends recklessly and runs deficits. This is the classic problem with most governments and the reason for the various crises across the world.

Reckless spending… profligacy, in a word. That’s the problem. Just like governments, we find the same problem with some of our clients.

Thankfully, it is not as widespread as it is in the case of governments!
When some of these clients come for Financial Planning, we have problems. It surprises us that these people could have money problems at all, as most clients who come to us earn pretty well. In fact, in most cases, they are double income families.

That’s why it surprised me when we found out that Raveena will not be able to meet some of her goals. Her husband Abhilash, again, earned a handsome packet. Still, it would be a challenge for them to buy a bigger home and ensure that they send their son abroad for education, like they wanted to.
At first, we thought we got some numbers wrong. We rechecked all the numbers and sought clarifications.

The numbers we had taken in the plan were right, after all. What stood out like sore thumbs were the various expense heads – Rs.15,000 pm  for fuel, Rs.26,000 pm for groceries/  provisions/  milk, Rs.10,000 pm for entertainment etc. The basic monthly expenses came to Rs.72,000.

There was also a total EMI outgo of another Rs.63,000 pm. Apart from that they had other chunky annual expenses like Rs.3 Lakhs for Holidays & vacation, Rs.1 Lakhs towards Gifting etc. totaling Rs.5.9 Lakhs. They had committed expenses of  Rs.95,000, towards insurance. All in all, they were spending with gay abandon with just Rs.1.6 Lakhs, as surplus in a year. That sounds like a positive story, while actually it is not.

Their burn rate is so vigourous that it leaves precious little for investments, to meet the future goals, including retirement funding. When I broke this news to them, their solution was simple. They almost nonchalantly said that they would change their jobs!

That was stunning news to me.  What a solution! This is what every government does – increase the taxes. Has it ever helped? Nope. The problem is not income. It is expenses. So I told them and an argument ensued. I argued that one should keep the expenses under wraps and be careful in upgrading the lifestyle, for it is easy to go up in life and very difficult to come down on it. They thought I’m too conservative and old fashioned.

They opined that they anyway change their jobs every 2-3 years and have no regrets about it. They also felt that if expenses go up, income can be made to go up too. So, if there is a need to save more, they can bring in more income. They were hence not able to understand, what I’m quibbling about.

I countered that though income can keep going up till a point, it cannot keep going up by huge margins, forever. If expenses keep spiraling, one will not be able to offset it by higher income. Also, higher expenses raises the bar forever. One will not be able to come down from that level.  Moreover, more income will simply mean more expenses in their case, for that is how they have been living. I rested my case saying that more income will not solve any problems for them.

This was sobering for them and they wanted to think about it. Many in their situation are in denial about their spending and almost go into a depression if told to curtail expenses.  But excessive spending is a disease and not being able to save enough for future is just the symptom. The pill that cures that is not more income. We need to attack the disease head-on, which is streamlining expenses.

Only then the symptoms will vanish and the patient will recover.  If continued for long enough, the situation will be like that of many governments today, where they spend much more than what they earn. Income one earns is seldom the cause for concern. Excessive spends and lofty goals not aligned with income, are. Internalise this and your nest will be nicely feathered. Ignore it at your peril.

The author is a Principal Financial Planner at Ladder7 Financial Advisories.

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