Instead of just focusing on investing, young people should find a balance between spending and saving

The public discussion about saving and investing in the media or social media focuses on the wrong topic. The most important point always seems to be where to invest. What’s the hot stock right now? Which is the best mutual fund? And, heaven forbid, which is the hottest crypto? For a young person who is just starting out in making money and is casually observing all this, the whole exercise of investing seems to be about choosing the best investment. This is completely misleading.

The real problem is that most people don’t invest at all or underinvest. They start too late in life, sometimes don’t start at all and then invest too little. Teaching young people the value of saving is said to be a big part of financial literacy. A few years ago, however, I encountered an interaction that gave me a new perspective on the psychology of saving among those who are just beginning to earn. On a TV show, a young man asked a question during a Q&A session on personal finances. He had just started earning and wanted advice on what to do with his money. His biggest wish was to buy a motorcycle worth Rs 1.5 lakh. He had dreamed of doing something for many years when he started making money. It’s not an uncommon dream.

He wanted to know the quickest way to save enough money to buy a bike. In response he received simple and sensible advice, complete with detailed calculations of how much he should save, what the return would be and when he could buy the bike. As a conservative investment advisor, I should have agreed with this approach. Postponing wish fulfillment is said to be a cornerstone of good financial behavior. However, I thought that if he started saving now he would probably be 30 by the time he could buy it and that he was just too old to enjoy this bike the way a young person would. In fact, he probably wouldn’t even want it then. So maybe he should break the rules of good financial behavior and buy the bike now with borrowed money, at an EMI.

Does that mean he shouldn’t save at all? After all, there is little point in saving while loans are being paid off. Nonetheless, my point is that such a person should also save a little, even if it is only Rs. 1,000 a month. Even when it comes to saving the money in a simple tool like a recurring deposit with his bank.

The reason for this is that, at its core, saving isn’t really about the arithmetic of returns and interest rates and so on. It’s actually a mindset, a habit. A person who saves even an insignificant amount of Rs. 1,000 a month is a fundamentally different type of person from the one who spends everything.

What I’m saying might not stand the test of proper financial advice, but it’s probably better to spend on what you want, as long as you know it’s enjoyable, while also starting to make the habit of saving. Once you observe the magic of earning interest on your savings and seeing money growing on its own, this face-to-face experience will be far more effective than any financial literacy course you attend. Inevitably, savings grow, people save more, and it becomes a virtuous cycle.

(The author is CEO, VALUE RESEARCH.)


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