‘A penny saved is a penny earned’ is an adage you will hear so often that its sheer repetition will make you believe it to be true. But is it really true? Sure, money not spent right now is sitting to be spent on something else later. Economics defines this as opportunity cost. But in this article, I am going to argue against ‘thrifty saving’ as a way to ‘grow your money’ or to ‘get and live rich’.
The story about thrift
Several communities endorse compromising on what you spend on today so that you can save for tomorrow. The point is not without merit. In the 1950s-80s, there used to be one bread-winner for a large family (three – seven children per couple), salaries were scarce, other means of cash flow were non-existent and you really had to count your money before spending it. It is still true for students who are living away from home with some pocket money. It is also true for job trainees on a meagre stipend.
But let’s look elsewhere. Middle-class families have shrunk (one – two children per couple) since the 90s. There are more white-collar jobs and salaries have increased. Often, both parents are working at jobs and the salaries are pooled. But thrifty habits die hard. Even now, I see well-to-do families saving to the point of unhappiness with their current lives, for a ‘better future’ or a ‘rainy day’.
It’s sad to see that squeezing some drops out of every penny and gathering it into a pool for the future is still the go-to mentality for the several families. Can we make them happier?
And then, we see people who always seem to enjoy the best experiences that life has to offer.
While thrifty Ashok takes a train and a bus to work everyday, Abha does that only on Mondays, Wednesdays and Fridays. She prefers a taxi every Tuesday and Thursday. She certainly takes a taxi on the mornings when she has an important meeting, regardless of the day of the week.
While Ashok is happy with a street-side burger and a cutting chai when eating out every weekend, Abha seems to be eating exotic dishes at the best restaurants in the city with her family, come weekend.
Ashok is happy to go to the local amusement park when he wants to step out of the bustle of the city, but Abha seems to be posting pictures from exotic locations from her holidays.
Last I checked, Ashok and Abha were earning almost the same. Abha perhaps slightly more, but not substantially. What is going on?
And here is where the thrifty ones are fast to jump to vile conclusions or denial.
“Well, you know, Abha is from a rich family. Her parents must still be gifting her money.”
“Abha doesn’t really pay taxes. She is using that money to enjoy herself and then cunningly writing them off as some category of tax-saving expenses.”
“Bah, who cares about that rich-looking coffee outlet? Whether you drink it from a street-side glass tumbler or a china clay cup and saucer, coffee is coffee. That place is just ripping you off under the pretext of ‘ambience'”.
“You know, it is not these material things that matter in life. You are bound to keep hoarding them. Life should be meaningful.”
It’s sad that no one has studied how Abha actually does it. It may well be due to how she handles her own money (no gifts from anyone) in a legal way (no tax flouting).
The truth may be that Ashok is an instinctive THRIFTY SAVER, with no set FINANCIAL PLAN and not willing to upgrade himself with the times, while Abha is an astute PLANNER and INVESTOR, always upgrading her knowledge about how money works and how she can make it work in her favour. She also takes ownership of her lifestyle with careful scrutiny.
Ashok, the thrifty saver
Ashok isn’t poor. He isn’t living hand-to-mouth. He isn’t struggling to make ends meet. He earns a decent salary to carve out a lifestyle he can enjoy. It is just that Ashok doesn’t particularly know what he is saving for. His instinct is to squeeze as much as he can from his current expenditure, so that he has money left over. He believes that any money left over can be put into a ‘safe place’ that will be ‘useful for the future’.
When asked about what this future is, the answers are vague. “Oh, it can go into my daughter’s marriage funds”, even when Ashok doesn’t have a daughter yet! Even the ‘safe place’ is vague. “Fixed deposits, maybe. They save a lot of tax, you know?”.
Ashok is also averse to the idea of losing money. Any of it. He pointedly stays away from stock markets or opportunities for higher returns, lest he lose all his money. He uses only fixed deposits and government bonds. He is also not open to the idea of starting a side gig that could give him another source of cash flow. He feels safe in his 9-5 job.
The more you talk to Ashok about why he is saving so much at the cost of depriving himself of any enjoyment, convenience or opportunities today, the more bewildering it can be. You wonder what he really wants. It seems like he is a creature of instinct and his instinct is to save as much money as possible, whether he really has concrete plans for all that money or not. It feels that despite being financially well off, Ashok is afraid that every expenditure depletes his wealth and that one day he may run out of money. As an offspring of parents with a traditional mindset about money, he was trained to save, save and save. That’s all he does!
Abha, the investor with a plan
Abha approaches the challenge of saving for the future from another angle. She has a book for financial goals and their deadlines. In this book, she has prioritised the goals by deadlines and by those that she would love having achieved first. She has calculated to the best of her knowledge, when she should start saving for that goal, how much to set aside every month and for how many months to save for each goal. She constantly reviews her goals, their progress and their importance to her going forward. She also makes sure that she does not overwhelm herself with too many goals at once. She is only financing 3-4 goals at any one point of time. One or two of them are goals with huge targets that she will finance for 10-20 years (e.g. down payment for her dream home), others will be short term goals with small targets (next premium for her life insurance, her dream trip around north-east India), due in a few months or upto two years away.
Based on how much time is available for each goal, she needs to take decisions on where to invest that money. She studies hard about stocks, fixed deposits, corporate and government bonds. She studies about index funds, futures and options. She studies financial reports of businesses, so that she knows whose stocks to invest in. She knows that different financial instruments are useful for different periods, such as stocks giving great returns if invested in for 10+ years, and fixed deposits and bonds being perfect for 5 years or less.
She is also taking stock of her different skills and working on steps to build her own side gig that can give her a secondary source of income. Some of her investment money will go into her own business instead of into stocks, deposits or bonds.
Abha, the lifestyle chooser
Abha has another successful habit. She notes down all her lifestyle expenses on a monthly basis. When asked how much her current lifestyle costs every month, she has a ready average in her mind.
She has a written piece on what activities in her current lifestyle she really loves and what items can be discarded, upgraded or downgraded. For instance, since good movies are few these days, she can scale down her 4 movies a month down to 1 movie every month. 3 of those movies are crap anyway. She can also get rid of her first-day-first-show obsession and go two days after release after the reviews are published.
However, she decides that she really loves her expensive cup of coffee at the local coffee bar with world-class baristas and is not ready to switch to street-side take-away instant coffee in a paper cup.
Abha’s mother keeps advising her to take a train and a bus to work everyday, but Abha is resolute about taking taxis twice and public transit only on the other three days. She says it keeps her fresh at work and it’s important to her.
However, she takes her mother’s advice about using more moong (green lentils) instead of channa (chickpeas) in her cooking, since the cost of channa has been increasing steeply. Moong has the same level of proteins, she reasons. But she rejects her cousin’s suggestion to combine channa with potatoes in order to make the recipe cheaper. Potatoes are just empty calories as far as Abha is concerned.
You can see that Abha is honest to herself about what is important to her in her lifestyle. She accepts her weakness for barista-whipped coffee from a retail chain and refuses to compromise and accept what she feels is a downgrade. She does not fall for others telling her that retail chain coffees and taxis are expensive. Likewise, health is important to her and she refuses to dilute the quality of protein in her recipe. However, she is not adamant and listens to her mom about substitution with cheaper ingredients, given equal nutrition. Abha has figured out what makes her life in present tense happy and productive. She is determined to stick to it, no matter what the lifestyle costs. She does not let others dictate what is right or wrong for her. To everyone, his/her own lifestyle.
Abha, the guilt-free celebrator of life
Abha has what she needs to go ahead and celebrate life. She has figured out how much she needs to put away every month towards her goals. This is what she does FIRST. As soon as her salary checks into her bank account, a couple of things happen. Some standing instructions are automatically executed and fixed amounts are transferred into deposits. Where things cannot be easily automated, Abha plays an active part. E.g. buying stocks, looking for opportunities to invest, such as newly announced bonds, etc.
That done, Abha’s mind is free to know that all the money left over from the month is hers to enjoy. She can indulge in her lifestyle free of guilt. She knows that her goals have received their monthly contribution and that however much she enjoys now, she cannot dramatically run out of funds. Sure, there are some months where she may have less left over to fully finance her lifestyle and she may have to skip her monthly movie. But that’s okay. Abha is happy with how her life is today. She isn’t compromising her lifestyle quality by squeezing every penny for an uncertain tomorrow.
So, which one are you?
Are you Ashok, who is convinced that you must make sacrifices everywhere today so that you will have enough left for tomorrow? Or are you Abha, who makes plans for the future, executes them and leaves enough margin to know that present tense is also something to be enjoyed?
Let’s review the two approaches again.
- Lifestyle is just a hype. Make sure you spend as little as you can today. Be super thrifty. Save every penny you can in every expenditure you make.
- By looking for saving opportunities everywhere, amass so much that it will be enough for your future.
- Plan out your life’s goals, how much money they need and when they are due. Work out a per-month saving plan for each goal. Prioritise your goals in the order they should be completed.
- Finance only 3-4 goals at any time. Finish financing one of those goals before you pick the next goal.
- Record your lifestyle expenses. Review what makes you really happy and what is just hype. Resolutely maintain what makes you happy and do not listen to anyone who says it’s wrong. Their priorities are not yours. Ruthlessly trash the expenses you are convinced are hype or are not making you happy.
- After taking care of contributions to your goals, spend the rest on yourself — guilt-free.
Now you get to evaluate and decide which one you are and which one you want to be. One thing to note is that none of us is either fully Ashok or fully Abha, but somewhere in the middle. We may have our financial goals partially figured out. And where a certain expense looks doubtful, we may revert to thriftiness. And that’s okay. The goal is not to be perfect. But to be deliberate and improve every day. Everyday, we need to leave the uncertain Ashok inside us behind and embrace a little bit of the organised Abha. Work towards being an investor with a plan and not a thrifty saver.