Instead of focusing only on investments, young people should find a balance between spending, saving
The real problem is that most people don’t invest at all, or invest too little. They start too late in life, sometimes don’t start at all, and when they do, they invest too little. Teaching young people the value of saving is meant to be a big part of financial literacy. However, a few years ago I came across an interaction that gave me a new perspective on the psychology of saving in those who are just starting to earn money. On a TV show, during a Q&A on personal finance, a young man asked a question. He had just started making money and he wanted advice on what to do with his money. His greatest wish in the world was to buy a motorcycle worth Rs.1.5 lakh. He had dreamed of it for many years as something he would do when he started making money. It’s not an uncommon dream.
He wanted to know the fastest way to save enough money to buy a bike. In response, he received simple, no-nonsense advice, complete with detailed calculations on how much he should save, what the returns would be and when he could buy the bike. As a conservative investment adviser, I should have subscribed to this approach. Postponing wish fulfillment is supposed to be the cornerstone of good financial behavior. However, I figured if he started saving now, he’d probably be 30 by the time he could buy it, and he’d just be too old to enjoy riding the bike like a youngster would. . In fact, he probably wouldn’t even want to then. So maybe he should break the rules of good financial behavior and buy that bike right now with borrowed money, on an EMI.
Does that mean he shouldn’t save at all? After all, it makes no sense to save when there are loans to repay. Even so, my point is that such a person should also save a little, even if it is only Rs 1000 per month. Even if it is to save money in a simple instrument like a recurring deposit in his bank.
The reason is that, fundamentally, saving is not really about the arithmetic of returns and interest rates and so on. It’s actually a way of thinking, a habit. A person who saves even an insignificant amount of Rs 1,000 per month is a fundamentally different type of person from one who spends it all.
What I’m saying may not pass the test of proper financial advice, but it’s probably best to spend what you want, as long as you know it’s an indulgence, and at the same time start taking the habit of saving. Once you watch the magic of compounding your savings and realize that money multiplies on its own, this personal experience will be far more effective than any financial literacy class you attend. Inevitably, savings increase, people save more and it becomes a virtuous circle.
(The author is CEO, VALUE RESEARCH.)