Save more for tomorrow

Often, people make resolutions at the start of the year and tend to forget about them in the coming months. The idea is to keep reminding yourself about what you have committed to yourself. I find it easier to share with a few friends so that they remind me when I detract. It helps me.

Similarly, I have heard many prospective clients wishing to start their SIPs (systematic investment plans). However, in a few cases, the conversation was not as easy as expected. When we shared the Excel sheet calculating the SIP amount required for their respective goals, it brought stress, as it meant cutting down on some expenses. It is not easy to do so since all expenditures seem necessary. Then, I alluded to the behavioural study conducted by Shlomo Benartzi and Richard Thaler. In their book 'Save More Tomorrow', people were made to commit in advance based on an expected increment in salary. The programme was a success. I planned to converse the same with my clients.

Normally, we do not attach as much significance to expenses when the payment is not being made in the present. Take the case of a credit card. The pinch in swiping a card is lesser than doling out hard cash. The same is true for future commitments. It does not hurt to commit to higher savings in the future since we have not anticipated the upgrade in our lifestyle expenses. In the same way, when we asked the clients to commit 5-10 per cent more than the previous SIP amount every year, it seemed easier for them. Beyond a point, expenses do not rise in the same proportion as income. Thus, I got a top-up SIP signed up.

What is the rationale for topping up SIPs? I often met investors who claimed they started an SIP many years ago. And they did. However, as incomes rose, they upgraded their standard of living. They bought bigger cars and homes. Their holidays changed from domestic to exotic locations. They also adjusted to higher home loan EMIs. However, savings continued as before, as the innocuous SIP. With every increase in EMIs, they adjusted their expenses. Would it not have been great if they did the same with investments?

A famous quote by Warren Buffett says, "Do not save what is left after spending, but spend what is left after saving." If the investors had increased their SIP amount, they would have also adjusted their expenses accordingly. When we earn better, a lifestyle upgrade is natural. Therefore, the corpus to sustain that lifestyle post-retirement also needs an upgrade. Because if we do not increase our investments in some proportion, the savings pool will remain too small to maintain our standard of living.

Sizing is critical in wealth creation. It is not enough to 'just participate' in the market; you must also increase your investments. Let's see this with an example of a client with a Rs 10 crore portfolio. We spoke to him about an investment idea which made sense in the current market. After much thought, he allocated Rs 5 lakh. Did that make sense? Probably not. Even if our call went right and the investment amount doubled, it would not impact his overall returns in the portfolio. Extending that logic to monthly SIPs, a top-up helps to size up better.

We should certainly think of increasing our investments with time. With inflation, the value of money reduces. A higher investment also helps in building a sizable corpus over time. We can choose the automatic route of signing up for it when registering for an SIP or opting for an increase voluntarily every year. I prefer automated instructions as they help us to keep emotions away. Whichever route you follow, an upgrade in investments before an upgrade in lifestyle is prudent.

Shyamali has been navigating the asset management world for over 20 years, working with everyone from the seasoned super wealthy to absolute beginners. She has a knack for understanding the human side of investing and empathising with investors, something that shines through in her writing. She can be reached at [email protected]

Also read: How to earn a million in a hurry? Start with a billion.