Do it for a few months, and you will see yourself itching to act when balances lie idle in the bank.
Sometimes it feels we are not doing enough. We had decided to begin that SIP, activate the PPF, invest in that equity share, and increase those tax savings. However, as we prepare to file our tax returns, we find those plans remain only on paper. Why is it that we don’t persist, even if our intentions were good?
First, we suffer from a starting problem. Even after several years of resolution to organise our finances, we allow money to lie in the savings bank account. Idle and unutilised. The endless postponing of the investmentdecision is not unique, though we think everyone else is managing their finances very well, while we are slacking. Investor inertia is a well-documented issue, especially when there are too many choices and we don’t know which one is best. Overcome by the possible regret from choosing wrongly, we think that at least money in the bank is safe and not losing value. Only nominally, because inflation would erode its value anyway.
We could assign a specific week in a year for product choice. Just as we file our income tax returns, and know we have to devote the time to meet that deadline. It could well be a week when we have a break for a festival we do not celebrate; or a week when pressures at work are seasonally lower; or a week when we are sitting up with the kids who are studying for their exams. In that week every year, we could look up mutual funds, equity shares, bonds, saving products and insurance policies, and make a shortlist. If we arrive at a default list of a few products, that would do. Through the year, until the next review week comes up, we can invest in these default products.
Those fears about the right time, the right product, the right strategy, and the right way to go about it, are all overstated. As long as you have done basic due diligence check about the product, and satisfied yourself that the issuer of the product is someone you can trust your money with, you will do fine. This will work better than the strategy, if you can call it that, of idle money in the bank.
Second, we are unable to make correct estimates about how much money we will need and when, and being unsure about it takes away the motivation to keep contributing. We like a simple estimate of how much we need to retire securely, and when faced with complex math that still provides no assurance, we are half-hearted in our contribution. The growing price of education keeps us anxious and we worry if we will have enough at all when our child grows up. We like nice and neat solutions and feel in control when things work to plan. The fuzzy numbers of inflation, market returns, risk, and volatility make it tough for us.
There is really no surefire way to make estimates for the future. Planning for our goals is only a framework that enables us to save and invest with a purpose in mind. We can still end up with less or more, depending on how the markets behave.
However, there is a saving grace. We have the benefit of the gradual process. We are not building the retirement corpus on a single day. When we save and invest over the earning period of 30 years, we will accumulate a sizeable sum, through the ups and downs of the market. When we retire, we are not likely to use the entire corpus at one time, but gradually draw from it over the next 30 years.
How much we accumulate depends on how we contribute, where we invest and for how long. An annual saving of Rs 10,000 seemed like a stiff target in 1986 for many of us who began to work for a monthly salary of Rs 1,600. But we persisted with the saving habit. As we stand on the verge of retirement, over 70% of the corpus comes from appreciation in the value of the investment, our contribution a mere 30%. In these 32 years, there have been severe market crashes, government collapses, global crises and scandals. It was not as if we had great wisdom and foresight to choose the right product and stay with it. It is just that we ensured that the savings were deployed in the default portfolio, and stayed invested. It is that simple. You don’t have to do all the heavy lifting if you have process, patience and persistence on your side.
Third, we cannot commit to a fixed sum and persist with it, because we cannot estimate the unexpected needs for money. Just as that prized bond is maturing, the house needs repairs; even before the RD has matured, the anniversary gift is due; just when we thought the car EMI is over, the child moves to a more expensive school. The travails of the household are indeed many, and there are more demands on the money we earn than we can manage. Saving and investing take a back seat, and worse, savings are used up periodically.
Some of us buy expensive insurance policies; or large EMIs; or SIPs for a big amount. We think money not available to spend, will be saved anyway. However, we get crushed by the overestimation and end up surrendering the insurance policy at a loss, keeping the PPF account idle, or skipping the SIP. An easier approach is to split the saving into two. A smaller portion that you will systematically invest at the start of the month, and a regular top up that you will do at the end of the month. Once you have linked your investments to your bank account, you can push any amount of money into the same product and folio that holds the SIP. In a good month you do more, in a bad month you do less, but before your salary hits the account, the balances have been invested.
This approach is your customised systematic investment that contributes to your assets regularly, while also keeping your savings account balances small. If you have a fixed deposit and a pre-sanctioned loan on it, and a credit card with a decent limit, there will be no killing event that will take you off guard when you have emptied the savings account. Do it for a few months, and you will see yourself itching to act when balances lie idle in the bank. We humans adapt rather amazingly.