Enjoy the present, save for the future

Distance yourself from investment choices, to avoid feeling the pain of cutting current expenses

In this column, we typically discuss the technical and psychological aspects of financial decision-making. We hardly venture into the philosophy of life and its bearing on your financial decisions. And yet, that is what we will do this week, prompted by a question posed by one of our readers: Is it necessary to save significantly, given that life is uncertain? In this article, we show why saving is important, despite an uncertain future.

Financial protection

Let us start with the premise that an individual is a spendthrift. This individual enjoys life, caring little about his future. What if this individual dies suddenly, leaving behind a family consisting of a spouse and two children? Agreed, the spouse may be gainfully employed. Also, the demise of the individual would mean lesser household expenditure. But, there will be a more-than-proportionate decrease in the monthly income.

Now, suppose this individual had thoughtfully insured his life. So, the family receives lump-sum money from the insurance company. The individual enjoyed his life, spending on material goods and life experiences, and his family’s standard of living has been protected after his demise because of the life-insurance payments.

The above argument seems to suggest that you do not have to worry about the future as long as you have significant insurance cover. But that misses an important point. What if you outlive the insurance coverage period? Suppose the insurance covers you till the age of 70, and you survive your 70thbirthday. Your family won’t receive survival benefits, if it were a term insurance policy.

If we spend too much now, we may fail to meet our life goals. And if we practice frugal living now and save for the future, it is uncertain if we will live long enough to enjoy our wealth. It is in this context that you should view the question posed by our reader.

From our discussion above, one point is clear. An individual has to save to meet some life goals, whether he/she is alive or not.

Children’s education and protecting your family’s existing standard of living are two such goals. Last in the pecking order is retirement.

If you are philosophical about life, you may be inclined to spending now, without worrying about your future.

How should you moderate, if not overcome, this quandary?

Mind games

You have to trick your mind to enjoy the present and also save for the future. To do this, you should distance yourself from your investment decisions. That way, you will not feel the pain of cutting your current consumption to save for the future.

One way to do so is by setting up a systematic investment plan on an equity fund and a bank recurring deposit as soon as you start earning.

Once you have set aside money for the future, you can spend the rest of your monthly income.

But your investments have to keep pace with inflation and your changing lifestyle.

So, saving the same amount every month may not suffice. You could adopt the ‘Save More Tomorrow’ programme to address this issue.

That is, set up automatic debits to invest 30-40 per cent of your increase in salary every year before you start to enjoy the salary hike.

So, what you do not have, you will not miss.

The upshot? Being philosophical is good for your spiritual growth, but not for your material well-being. Life is uncertain. You should nevertheless save to protect your and your family’s financial future.

The author is founder of Navera Consulting

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