The wants of people are growing. Middle class people are aspiring to go abroad for vacation, replace their small car with a SUV or a premium model, iPhone, iPad, and so on. Do we blame it on higher cost of living or poor money management skills? While inflation and external factors cannot be controlled, one can definitely use good money management skills to improve his or her individual and family finances to absorb future uncertainties.
Past vs. Present – Cost of Living
The increasing cost of living or rising aspirations is not a new phenomenon. This trend that has been witnessed for several decades and is expected to continue in future barring few exceptions.
For Example: I remember that in the early 1980’s my father could run a family of four (a couple with two kids) with a monthly salary of around Rs.1000.
Today this sum is just enough to pay electricity bills or just covers a monthly broadband connection bill.
To give you another example the cost of education has been spiraling and growing by leaps and bounds. The education expense when compared to the previous generation has grown exponentially.
For instance a simple kindergarten education fee is in thousands of rupees (against few hundreds earlier), while school education is costing tens of thousands (5 digits) against hundreds or few thousands earlier.
As we progress to high school, pre-college, etc the figures are out of the world. A professional degree in medicine, engineering or management costs millions of rupees today.
Value for Money – Attitude towards spending
Ofcourse times have changed. In the olden days there were not many avenues to spend but today there are umpteen ways to empty your pocket. There are umpteen things to compare past with present, but let me give you a few examples below:-
Past: “I am going to save to buy a Bajaj scooter”
Present: “I will book a Honda City since I can easily get a loan from ABCD Bank”
Past: “We are going to the mandi to purchase large bags of rice”
Present: “I’m going to Reliance Fresh or More supermarkets to buy some groceries. Let me know if you need anything.”
Money is crucial and very important, but money alone is not life, although it’s a major component of your life. So as discussed earlier you need to have value systems, good relationships and personal achievements as well to get ahead in life. Values and relationships are difficult to recover once lost, but money lost can be regained over time.
For example: If one goes through recent crime news we see a lot of young professionals getting caught in drug peddling, sex rackets, thefts, shop lifting, etc. These clearly show a tendency for people to do take up small petty crimes in the hope that once they make a million or so they can lead a normal life.
However, they get caught before making huge sums, and similarly they become a core part of the underworld when they make huge sums of money.
When these small criminals succeed, they are tempted to try more and that greed pushes them beyond the limits of ethics and responsible behavior. This is where the old fashioned value systems come to the rescue.
Once I had run up significant dues in two credit cards. There were instances when I didn’t receive my bills and couldn’t pay. There were two issues – one is inability to pay when expenses were too huge, and secondly inability to manage two cards (their due dates, payments, keeping track etc).
Card A had already crossed the credit limits, while Card B had a small balance. There were frequent calls, warnings and collection agents at my door step. It became too difficult to handle, and this impacted my work and daily routine as well.
I thought about this and decided to take a harsh but firm step – I closed the Card B (one with small balance) in 2 months by paying a few thousands as and when I had money, while I made small payments to Card A, just to avoid the threats from collection agents. If I had a lot of money I would have paid Card A and maintained Card B with a good track record. But now I was almost like a sinking ship, where I had to plug in the holes or repairs to keep the ship afloat.
Now I had one card, one bill and one payment to track. So even in worst case I could pay the minimum balance or a little more and avoid embarrassment. I stopped using credit cards, and within 4 months I could wipe off the whole balance on Card A.
The Lesson: Don’t buy anything until you have earned enough
Sounds like sage advice or something too outdated. If you have seen the Cadbury Bournville advertisement in the recent few months where it says “You do not buy a bournville, you earn it”.
In the olden days you had to earn a lot of things. This is at a very high level where values and respect are earned overtime and cannot be bought. But at a much lower and realistic level, we have wants and needs. Our wants should be acquired or bought only if they are really affordable.
For example if I cannot afford a Honda car I should not be buying it according to old school. But according to new school I can make a small flat payment and avail a loan and pay in 36 monthly installments. Which philosophy or approach is right?
Here one needs to take a balanced view. If you go by old school of though you will never buy a car until you earn enough to pay full cash. The new school is enticing you to get in to a debt trop so be careful. Instead take a middle path and avail of a loan that can be paid comfortably from you monthly disposable income. In addition build up some emergency savings that includes your 2 months installments so that you have some cushion or buffer at all times. Even in emergencies like a job loss you can still manage to pay for another 2-3 months without difficulty.
Being prudent with money & personal values
I have read many articles and stories of how people should teach their children the value of money and importance of saving. There are dozens of tips on how to manage pocket money, inculcate saving habit, etc. During my younger days I cannot recall instances where I felt the need or fought with my parents for pocket money or chocolates or whatever. I was a normal like anyone else, but was provided what I needed and never felt the need for money, although my peers and friends had pocket money.
More than money what I was thought was how to be a good human through values. For instance many of us are told that we should not waste food, not spend too much, help people in need, etc. If you have strong values then some of the money management framework is already in place. You automatically respect money and know the true value of money
Look at leaders and investors such as N.R.Narayana Murthy who are known more for their value systems and achievements rather than their net worth or size of assets. Warren Buffet, one of the richest legendary investors drives his own car, when he can afford a few private jets for commuting.
Just because you can afford something you don’t have to buy it. I’ve seen people splurging on branded wear, sports cars, cosmetics, etc just to have that momentary happiness which is too short lived. Since a lot of things are becoming affordable people are easily tempted to make wrong choices.
For instance Mr.Deepak managed to save Rs.50,000 after a lot of budgeting and planning for past 6 months. He plans to invest Rs.25,000 in good index stocks, because he already had a few investments in fixed deposits.
However, he sees an ad for a Rs.40,000 2 days 1 night Singapore trip that excites him.
He decides to have a holiday but the guilty feeling of not being able to invest in good stocks in a bear market at attractive valuations was haunting him all the time. Another 6 months later he managed to save Rs.70,000 and had opened his account and bought some of his favorite stocks when Sensex was at 22,000 level.
However within a month all his dreams were shattered as Sensex fell from its all time high to 12,000 levels. He lost almost 40% of his capital invested.
Sounds too dramatic, but this happened to many people in late 2008, when Lehman crisis shook the global economy and markets.
Value of Money – Conclusion
The whole aim of this article is to demonstrate that money should be respected and valued. Understand the value of money. Further, money takes time to grow and develop. For instance in India it takes around 15-16 years of formal education to become a graduate and another 2 years to become a post graduate.
However, we have had education goals during high school or earlier and planned accordingly. A similar approach to money management is recommended, where you identify important financial goals as soon as you earn your first salary. This will ensure that you have atleast 4-5 years to reach various milestones and goals.
In the olden days being a ‘lakhpati’ (person with networth in lakhs) was considered very rich, but today lakhpatis are just normal average people. So you should have a goal to reach a target networth of atleast Rs.1 million or Rs.5 million, depending on your current financial position within x number of years.
You can break these in to smaller milestones so that you can monitor your progress regularly and take corrective action where required. The old tale of ‘the hare and the turtle’ reminds us that slow and steady can win the race. Similarly, in financial planning regular and consistent savings as well as investments can help you reach your goals and make your dreams come true. If you have good and bad experiences with earning or losing money please feel free to share your comments or thoughts below.