Save more to save more
The biggest problem in investing is not investment choice, but that we don't save enough
By Dhirendra Kumar | Oct 15, 2018
In a Reddit discussion on savings and investment, I saw someone ask whether others in the group also found themselves saving more after they started investing. This person said that when he never invested, he would spend a lot of money on useless small expenses that could well be avoided. However, after he started a regular investing plan in a fund, just by monitoring it and seeing it grow, he found himself having a higher awareness of his financial situation. As a result, he started spending much less on useless things and started saving even more. Interestingly, a number of others in that discussion also said that something similar had happened to them.
I believe this is actually a very common experience. I have seen it in several of my young colleagues at Glade Guides. At some stage, money is mostly a way to buy the next mobile phone or planning for your first car. Then, those who start investing--typically in an ELSS for saving tax--suddenly start thinking of money in a different way. They have less to spend, so they become more aware of what they're spending. When they don't spend, they tell themselves that it's better because the money is growing. And then they want to save even more.
I've lost count of how many young people I have seen this happen to. They start with a small saving, typically just for tax-saving. And then, in no time at all, they start saving more. But here's the important thing--this doesn't happen to those who mechanically put in some money into PPF or some other tax-saving deposit at this time of the year. The fifteen year lock-in and the lack of any upside surprise means that such savings don't make investors out of savers, which happens only when a few conditions are met. One, regular investing, such as through an SIP. Two, an asset class that has potential for an upside surprise. And three, a sufficiently short lock-in period, something whereby a young person can look forward to actually reaping the rewards of self-denial.
It's the combination of all three that makes people invest more after they start investing a bit. All this ties in with what I believe is the biggest problem when it comes to people saving and investing. If you were to read through what is shoved in your face every day in the media, then the dominant message is 'SPEND!'. There's almost nothing where the message is 'SAVE!'. On top of that, if you do come across whatever is published about investing, then it would appear to you that the biggest problem in investing is deciding where to invest. However, that's actually a secondary problem.
The biggest problem is that the overwhelming mass of people doesn't save, or doesn't save enough. Whatever they do save is without real awareness, without projecting into the future, and thus without triggering the thought process that would lead them to save more and save better.
In fact, all of us in the investment media are culpable because we try to focus so much on where to invest. This sends out a subconscious message that if your savings are not growing to some level that you want them to, then the way to solve it is to find a better investment. This is the dominant theme in all investment media and in all questions that savers ask about money. However, the true answer often lies in the fact that most savers don't save enough. .
And one effective way for saving more is to just start investing systematically in equity..