Balancing the present with the future

Meet your current lifestyle needs without sacrificing your most important life goals

How much should you save from your current monthly income to meet all your life goals? We have often been asked this question by individuals who self-manage their money. In this article, we show why the question about how much to save is as much a philosophical inquiry as it is a financial decision.

Present vs future

There is a no hard formula to tell you how much to save! Why? You must use your current income to support your current consumption and save for future lifestyle needs. Which is more important to you? Your emotional side will force you to spend more for your current consumption. After all, you and I suffer from Present Bias. This refers to our preference to experience happiness today rather than later. Yet, you and I know that our active income may not last for long. By active income, we mean income earned by using our skills. This income is different from the passive income you may earn from your investment portfolio. We all have to retire some day. There is also the possibility of job loss even during working life. So, your logical mind prompts you to think about the future.

The battle in your brain between the present and the future creates confusion. This battle is further made difficult by the fact that our future lifestyle consumption is based on our health conditions and, importantly our longevity. We do not know how long we will live. So, our longevity is uncertain. On a philosophical note, should you save more for an uncertain future or should you enjoy the present?

This question is, indeed, debatable. For some, the present is more important. So, you may save by default and not by choice. For others, saving to meet future goals is important though, in the process, you may sacrifice your current happiness. Without sounding too philosophical, we wish to state that current happiness is important. Remember, if you are happy today, you may also be motivated to earn more. And that, in turn, can help you meet your future lifestyle needs as well. So, spend to meet your current lifestyle needs without sacrificing your most important life goals. How? You could follow one of two possible routes.

Spending vs saving

The first route is to list the two important life goals. For most of you, this would be your children’s education and buying a house or your retirement. Set up monthly systematic investment plans (SIPs) on an equity index fund and recurring bank deposits to meet these life goals.

You can spend the rest. That is the traditional route. The second route is biased towards the present. You should set aside not more than 30 per cent of your total post-tax monthly income towards savings. You now have 70 per cent of your current post-tax income to spend.

Which should you prefer? If you are under 30, the second route may be more suitable. Note that repayment of outstanding loans, including student loan, will have to be repaid using the 30 per cent savings. But if you are pushing 35, you should consider the traditional route. Why?

Your parents and grandparents had to deal with primarily one uncertain factor — their longevity. You have to deal with another uncertain factor as well — loss of active income due to an uncertain job market. So, saving for the future is important. Therefore, try to save for your important goals without sacrificing your present. Of course, that is easier said than done!

The author is the founder of Navera Consulting. Feedback may be sent to portfolioideas@thehindu.co.in

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