Financial planning has different implications for different people. To those like us, who have been interacting and partnering with people in their pursuit for financial well-being, it means living a fulfilling now while planning to sustain the same lifestyle throughout your life.
In our numerous interactions with people, we have noticed many kinds of investors. A few are balanced in their need to live a good life today as well as save for the future. Some are very involved in the now, and live an indulgent life-style with no worries about the tomorrow. But many are constantly worrying about the future, so much so that they compromise on even little things which bring them great joy. We are going to discuss this last category since we have noticed some common traits which distinguish them and we strongly believe a different approach can significantly change their lives.
Worrying more about curbing expenses
I remember a recent interaction very vividly. We had met a family and were discussing their goals and current investments. Normally, getting people to give us realistic expense statements is a tall ask, requiring us to really push people to get it done. What was pleasantly surprising in this case was that both the spouses had a complete handle on their current expenses. As is normally the case, we got down to discussing their goals and investments. I noticed they were restless with this discussion and would soon circle back to their expenses. They wanted to know by how much they would have to cut their expenses to be able to meet their goals. Both had good jobs which paid them decently. But their expenses showed that they lived a very frugal life. They spent a large part of their savings pre-paying their home loan. They had modest holidays planned a couple of times a year.
When they started articulating their future goals and plans, they were slowly getting into a state of panic and would intersperse the discussion with statements like “we can cut on our holidays to save more,” “Just let us know by how much we need to reduce our expenses to be able to meet all our goals,” etc.
I was genuinely taken aback since we often meet people who spend a lot more than they could afford to but were blind to it or had a lot of reasons to justify the same. Here was a couple that had plenty of time on their side – they are in their 30s. They led a frugal lifestyle and were still looking at cutting on their expenses to ensure they had a sustainable future.
We explained that they were looking at their problem from the wrong side. They were looking at curtailing expenses, which cannot be done beyond a point. This becomes all the more impractical since a large part of the expenses (as high as 50-60 per cent in many cases) are fixed (EMIs, school payments, house maintenance, parental support, etc.). The remaining ones are operational living expenses, some essential (groceries, utilities, house-help support, etc.), and some discretionary (eating out, movies, vacations, shopping, etc).
Imagine if you had to cut down 10 per cent of your expenses; it may be difficult, but in a majority of the cases, it may still be doable. But when you venture to cut expenses by, say, 25 per cent, it effectively means cutting down entirely on discretionary, and in the medium term it is going to lead to a lot of unhappiness and dissatisfaction. None of us comes with a fixed expiry date and there is always the nagging worry that you are forgoing a lot in the hope of a good future, which is uncertain.
Making money work for you
The way to look at building wealth in our opinion is to see how efficiently your money is working for you. It sounds very clichéd, but hear me out. We do not see the point of cutting the small joys of your life only to invest your money in some instrument which does not even beat inflation. That is exactly what this lovely couple were doing. They were very risk-averse and hence had chosen to invest in inefficient assets. They were also busy repaying a home loan which was available cheap (since one of them was working for a financial institution).
We looked at ways of deploying their surplus to generate returns over the medium term by taking measured risks. Since the home loan came at a low cost, we decided to retain it and concentrate on building their financial assets rather than knocking off their home loan in hurry. A rejig of their investments and thinking was all that was required to get rid of their fears.
When you start focusing on how best to make your money work for you rather on how to cut expenses, you are sure to come with solutions which build wealth for your future while also ensuring you have a beautiful today.
Make sure that there is a balance between the now and later, and have the peace of mind that your assets are working the best they can to build your future, so that you enjoy your present fully without guilt.(The writer is a Certified Financial Planner and Founder of Finwise Personal Finance Solutions)