Budget for Savings, not Spending

MARION JONES RUNS OUT OF MONEYPublication: The Times Of India Mumbai; Date: Aug 14, 2007; Section: Your Money; Page: 42


Becoming and staying wealthy is not a matter of earning more, but of keeping what you earn American sprinter Marion Jones is down to her last $2,000, according to The Los Angeles Times. Yes, the same athlete who won five medals, including three gold, at the 2000 Sydney Olympics, shone on magazine covers, and signed multi-million dollar endorsement deals. Fast forward to 2007, and she has been declared bankrupt.

We saw something similar in the movie Tara Rum Pum, where actor Saif Ali Khan plays a car racer who travels a similar path from wealth to insolvency. Well, the film had an important message:one should save for a rainy day and plan well for the future. The reason is clear: history shows that any income can be spent.
There are plenty of richesto-rags stories of business tycoons, builders, brokers, media celebrities, and sports stars going bankrupt, due to several reasons, including:

Faulty business plans

Excessive concentration of assets in one asset class

No written plan for managing money for the future

Inadequate savings to maintain one’s current lifestyle in the future

Purchase of unproductive assets
We live in an era of unprecedented opportunities and income levels. At the same time, we also have more ways than ever before to consume and spend. No matter where you live in India, chances are that you have your favourite brands of coffee and pizza, and that you have (or would like) a cool phone and the latest car. Which makes that one basic financial rule all the more important: plan your finances, not just to create wealth, but also to leave some of it behind for the next generation and for society. With this rule always in sight, it is easier to keep the money you earn, without sacrificing the good life.

Those who appear rich are not necessarily rich. What ultimately matters is now how posh you look, but that you have a high net worth. And the point is never how much you earn, but how much you keep—and more importantly, how much you put to productive use by investing. People who earn in thousands can become crorepatis by diligently following the path of savings and investments. There are several examples of them in our current economy. At the same time, people who have earned in crores have later faced bankruptcy, including some of our noted film stars.

There is a tendency today among many people to live a page three lifestyle on a working-class income. Current lifestyle has become more important than saving for a rainy day or for one’s future. “I enjoy each day to the fullest” or “I never plan ahead” may sound fashionable, but it’s certainly not prudent. People often give into impulse buying without considering what such purchases are doing to their financial lives. If that sounds sententious, I should confess that I, too, have been guilty of such practices. It’s marketer’s job to strike an emotional chord and get you to buy things that you can’t afford, don’t need, and perhaps don’t even want. I once met a gentleman in Dubai who thought nothing of shelling out Rs 20,000 for a day’s drive in a Hummer, and then complained that saving was a tough thing to do. He drew up many spending budgets, but yet somehow the savings never piled up.

So what’s the magic financial mantra? Don’t keep an expenses budget; keep a savings budget. Implementing and following an expense budget is tough. You might keep it up for a month, several months, or even a year. But most such budgets are doomed to failure; a time will come when you
just can’t resist the temptation of some new gadget, a new car, or a nice vacation. Better to just set yourself a savings target of 15-25% of your gross annual income, and move this amount to a mental account called “My Road to Riches”. The money should be deployed productively in investments, whether cash, debt, equity, or real estate. If you follow this plan consistently, you will surely end up wealthier and safer than even people who earn more than you but who set a great store by “looking” rich. This is the principle of “Pay Yourself First”.

A gentleman I know adopted the “Pay Yourself First” principle with very modest amounts of Rs. 50 and Rs. 100, starting in the 1970s. He kept this up for 16 years, until about 1995, after which he saved relatively less. In 2003, his portfolio was worth Rs. 5 crore, and in 2007, around Rs.12 crore.

Keeping money is as important as making money. What you do with your income today determines what you can do with it tomorrow, whether it goes up or down. It’s just not productive to think, “I’ll definitely start saving when I make more money” or “I don’t make enough to save, so I should first concentrate on increasing my income”. Start saving today by setting aside at least 15-25% of your income. It will make a big difference to your future. Unlike Saif Ali Khan’s character, we real-life people are usually not lucky enough to get a racing opportunity at the right time, and to win the race. So it’s best to start now—it’s never the wrong time to do the right thing.

Amar Pandit is a Certified Financial Planner and Director, My Financial Advisor

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