The spending saving conundrum

Investors sometimes perceive financial advice to be harsh, especially when it challenges the way they think about money. Take the Sridhar and Rekha Pai, whose daughter’s marriage is being planned next year.

It is their dream to have a beautifully crafted wedding for their daughter, given that their own marriage was a court marriage. While they do not aspire to host a big, fat wedding, the wedding expenses will make a dent in their savings. The Pai’s financial advisor has cautioned them against this spending and the impact it will have towards their retirement savings.

This is a common dilemma individuals face – save or spend. It ultimately boils down to choosing retirement savings or spending on essential goals like education or marriage. Most parents end up prioritising children’s needs over their retirement driven by their parental responsibilities. The issue is that people go completely overboard on spending for kids and consequently put their retirement savings on a back burner.

The Pais contention is that this is an important life event for them and hence they are willing to make the extra spend, as they have been otherwise quite balanced with their spending. People across generations grappling the same predicament – how to have enough money to live well and fulfill their aspirations.

Here are a few things to consider:

Firstly, understand that there needs to be a balance between saving and spending. That balance is unique for each individual. Think of it akin to steps taken to maintain physical health. Excessive eating and lack of exercise results in poor health. Most people balance diet and exercise to remain fit. Similarly, low savings due to excessive spending, especially lifestyle spending, cannot lead to financial security.

This balance can be achieved by figuring out expenses which will make a difference to your life and not just your lifestyle. Think about what will make life more fulfilling and what expenses you can do away with. For example, buying a luxury SUV on EMI will improve social standing but would one then be able to fufulil an important goal. Ultimately, one will need to give up on some desires to build a better future. It is akin to foregoing certain foods for better health.

Significant effort is taken to maintain physical health because its benefits are tangible and immediate, whereas financial health benefits are only seen gradually in the long term. Financial health needs to be thought of like physical health and a balance between spending and saving needs to be created. A 60:40 allocation between expenses and savings as a percentage of take home is recommended on a regular basis. For big expenses which may be unplanned for, work out the best possible budget which may mean cutting down on some things. Like the Pais decided on moderately priced decorations and conducting one function at home with only family members. One can also consider having the children contribute towards these expenses. 

It is essential to cultivate a balance between saving and spending early. If this has not been done, prioritise creating that balance now, recognising that one cannot have it all.