Monday, January 21, 2019

Do not oversave for future...

In this post I want to discuss something that I call 'The fallacy of savings'. This is related to the habit of over-saving for a rainy day. I have seen this happen with many Indians. We love to save. The importance of saving is instilled in our mind from early childhood. 

Almost all of us save for the ‘Rainy Day’, that time in future when we do not have earnings but will need to maintain our standard of living and would need to support our possible spurt in expenses. Because we are worrying by nature, we over-save for the future sacrificing our current expenses. 

Let me explain with a small math. Let us say that we need to One Lakh rupees a month for our future expenses. That will be 12 Lakhs per year. If we consider 30% income tax, we will require 12/0.7 =17 Lakhs per year of income. At a conservative interest rate of 7% per year, this will call for a saving of 17/0.07, about 2.5 Crores. Factoring in a buffer of 1.5 crores for unplanned expenses, we will need about 4 Crores of savings. 

A saving of four crores will allow us to live luxuriously, pay our taxes and cover unplanned expenses. 

Many people over-save. They sacrifice their current spending for future saving. They postpone their vacation. Instead of going to Paris, they decide that they want to ‘See India’ Instead of staying in five star hotel, they search for cheap home stays. They do not enjoy now, over-saving for a rainy day in future. 

What is the result? At old age they have money but nowhere to spend it. Their educated children  are well off and do not need inheritance. Children asks their parents to ‘enjoy’ For the old parent, the enjoyment is lazing in Verandah sipping hot coffee. 

I am not saying we should not save. We definitely should. But also spend. We are a visitor to this earth. Enjoy what it has to offer. Take the vacation, stay in the five star hotel. Do that skydiving, Enjoy that cruise. Don’t live like a prisoner, not taking any vacation and not going anywhere. 

Live now, do not regret later.

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