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Here is how you can avoid splurging and encourage saving

Reckless spending leads to almost no saving. It deprives the individual of wealth creation opportunities, which he could have tapped had he saved money.

February 03, 2015 / 04:42 PM IST

Steven FernandesTravel in any part of the city and one comes across huge billboards of malls offering mouth watering discounts. In the last few years it has become a trend of sorts to offer discounts almost throughout the year. Earlier most people used to wait for special occasions like Diwali, Dusshera etc as retailers used to offer great deals only during that time. Nowadays people spend most of their time on weekends at various malls, either due to lack of open spaces or to catch the latest bargains. Our spending habits have changed over the last few years. The local kirana store has been replaced majorly by malls which have mushroomed all across the cities, reflecting the increasing purchasing power of our middle class. To complement physical shopping now we also have online shopping which is growing by the day. It’s not uncommon to find many people, especially youngsters hooked to online shopping. The ease of payment options has only increased its popularity. Most household budgets, if at all they were being maintained one, have gone for a toss. We all are spending more than required. A simple example will enumerate my point. An average shopper who once used to buy clothes only twice a year during festival time, now makes several visits to the mall and ends up buying clothes much more that he would need because the way the sale is advertised, makes it look like a great bargain. It is as if you won’t be able to buy again at those prices. We eventually end up spending more than required and thereby compromise on our saving opportunities. Losing out on investing and compounding“A penny saved is a penny earned”. We all know that money invested over long period benefits from the power of compounding. For example if you are able to resist splurging Rs. 5000 and instead invest that amount in a long term growing asset such as a diversified equity mutual fund,   assuming a 15% return over 10 years, you will end up with a tax free amount of Rs. 20,227. If the period is extended to 20 years then the value shoots up 4 times from there to approximately Rs. 81,832. So the amount of money that you can potentially save by avoiding unnecessary spending has the power to grow nearly 16 times in equity mutual funds. By spending that money, you are giving away the opportunity to multiply your money. Just imagine if you start maintaining a simple budget and consciously puts aside savings into this asset class in the form of SIPs, you could end up creating a very sizeable corpus for yourself. Maintain a BudgetIf you know how much your monthly expenses are, it becomes easier to plan investments of the surplus accordingly. The challenge is to write down or make a note of your various expenses over a couple of months so you are in a position to accurately ascertain how much you are spending every month. You can also plan your shopping especially the clothes and other items as per your need rather than doing so as per the “Sale season”. This will help you avoid the impulse that comes along with the sale season. Creating and maintaining a budget is a daunting task in today’s times but it’s not impossible. If you really want to avoid overspending, then there is no choice. Avoid using Credit cards very oftenCredit card issuing banks often lure card holders with reward points that encourage more shopping. At the same time, there is a tendency to shop more as one does not need to pay instantly. If you are not able to pay the credit card outstanding on time, then most card issuers charge interest between 24 to 36% annually which nullifies all your gains from discounts as well as reward points. It’s always a good idea to set some spending limits for your credit card for example setting a limit of 25%-30% of your monthly income. This will bring some discipline in your spending too and avoid getting into a credit card debt trap. In this world full of uncertainty and job insecurity, it makes sense to add a little discipline in the way we spend our money. The author is a member of The Financial Planners’ Guild , India (FPGI). FPGI is an association of Practicing Certified Financial Planners to create awareness about Financial Planning among the public, promote professional excellence and ensure high quality practice standards.

first published: Feb 3, 2015 04:42 pm