Summary of this article
People are earning well, yet are not wealthy.
Reason behind this lies in their daily spending habits.
Unstructured budget plans are part of the reason for this.
By Suresh Sadagopan
Incomes have gone up. People are earning well and have the potential to save a significant portion of their earnings. It is another matter that they do not save & invest as much as they possibly can.
The avenues to spend money have multiplied, making it easier than ever to click and feel the adrenaline rush. Also, credit cards and loans have lent wings to aspirations. Suffice it to say that this has fanned consumerism like never before. The only problem is that the income vanishes faster than mist when the sun comes up! And there is little to put into the investment bucket.
Income Is Not The Problem
Many earn quite well, so that is hardly the problem. However, people struggle even while earning handsome salaries.
Expenses and goals are the problem! There is no concept of a budget with most people. They do not keep track of expenses, and spending happens till the bank account is exhausted. Not that it stops there. Loans and credit facilities lend wings and take people beyond the horizon with their spending.
Control The Controllable
As advisors, we have heard many people say that they can increase their income if needed, but do not want to curb their lifestyle. But this is wishful thinking for the most part, as it is not possible to increase income at will, whether one is in service or in business. If it were that easy, would they not have done it already?
For income to go up, one may need to take steps in terms of upskilling/ qualifying oneself. In business, it is possible to increase drawings only if the business is inherently profitable and there is scope to draw more remuneration.
People also discuss a lot about inflation, the economy, interest rates, taxes, geopolitical situations, etc., all of which are not in anyone’s control. The only thing one has any control over at all is one’s expenses and the goals ( in terms of what one wants to commit to that goal ). This simple fact is not understood by most, and they end up stubbing their toe.
Poor Money Management
It is quite common for many to keep a big sum in the savings account, just so that they feel comfortable with the liquidity. Even money needed for potential contingencies keeps idling in the savings account.
Money lying around earns a low interest and is also vulnerable to online fraud. For many, money lying around in the savings account is an open invitation to spend!
Time is a constraint for a whole lot of people. Hence, any money that has hit the account lies around for a long time. The other reason is that they are not sure where to invest the money, which results in the decision being delayed, resulting in the money idling in the account for a long time.
People invest in inappropriate investments, which again is poor money management, resulting in higher costs, taxation, risk, exit limitations, etc. For instance, many invest in Fixed Deposits when they are in high-income tax brackets. This results in them paying taxes and surcharges on interest income, resulting in poor post-tax returns.
Mistakes And Blunders
Investors act based on what they read, see on TV or Social media, hear from friends, etc. This results in investments that are not aligned with their needs and requirements. Sometimes, they are outright wrong choices.
A product-based approach, often based on what is doing well or trending at that time (like Gold, Crypto, property, etc.), is not the best way to build a portfolio.
Some follow their instincts and gut feelings while making investment decisions. Some of the decisions arising out of such an outlook are downright speculative.
Many of these problems will not arise if there is a good advisor who can offer sage counsel. Successful people are prone to the hubris that they are bound to be good in every area and are cock-sure about their abilities, including in the investment area.
They do not understand that investment and financial planning is a specialised area, and they can leverage the experience, expertise, and gain the perspectives of professional advisors to their advantage. When there is no blueprint to follow, the actions are chaotic, resulting in poor outcomes.
We have seen the mistakes & blunders that investors commit set them back by years, lock their investments in inappropriate products, and result in a portfolio that lacks coherence. They also lose money or at best, make very little money.
Investors should focus on what they can control instead of worrying about market externalities. Getting their investment portfolio aligned to their needs is far more critical than chasing returns.
Finally, having a credible financial advisor will bring clarity, result in a purpose-built portfolio, and smooth sailing in life.
We work for close to four decades to earn money. We end up earning well, too. It will be a pity if we leave the management of that money to chance. Staying poor after all this is not an option!
The author is the MD & Principal Officer at Ladder7 Wealth Planners and the author of the book “If God Was Your Financial Planner”
(Disclaimer: Views expressed are the author’s own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.)
