10 April, 2009

Money saved is money earned...

Money saved is money earned is an epithet that had struck a chord in the generations gone by. That is old fashioned today. Now, it is a cocktail of individualism, hedonism and indulgence, in a heady mix. That should be fine, within bounds. But then living the good life is costlier than ever before. There is an ever increasing array of products & services that competes for attention today.  And their price range can be a wide swathe too. Gone are the days when you would go to a shop and order a TV, ranging from 14” to 29”, costing upto Rs.30,000/-. Now, you will have to first decide if it is the regular CRT, LCD or Plasma, that you want. Then you need to decide the resolution, HDTV or normal, ability to play different signal formats like PAL, compatibility to play different file formats etc. The price varies all the way from Rs.6,000/- to Rs.3.5 Lakhs!


What does that tell you?  The decision making is complex and the price band is like the Grand Canyon. You could easily tip in to a desire in an unthinking moment and end up with a white elephant.  Many do.  That is why the salary, any salary, is not enough. And we keep waiting for increment, so that we can change the job after that and get some enhanced leverage! But even that does not help. We have done that many times, haven’t we?


If that is not helping, what is the problem and the solution? The problem is elsewhere. Not enough money is just the symptom. The problem is of expenses ballooning too fast, in comparison with the income. We do not seem to be putting enough thought to rolling back expenses, as much as we are obsessed on increasing the income. Expense reduction is seen as uncool. But then, if we are prepared to take a more serious look at it, it might instead be cool.


Ethiraj typified the y-gen – cool attitude & rocking lifestyle. He was earning very well and he had a knack of spending just as well!  His forty grand take home was more than his wants by four thousand.  Only last year, he was earning thirty thousand and was able to put aside five thousand for his further studies.  One year later, that is down to four thousand, inspite of the salary increase. It is threatening to halve to two thousand. Ethiraj is panicking now. He needs to send that five thousand home. He is searching for another, better paying job.


Now let us see if that would help. Let us say, he gets another job at forty five thousand a month, it will temporarily ease the situation – leaving him a surplus of about seven thousand. But if his track record is anything to go by, that would taper precariously within a year. Fundamentally, earnings are not a problem with him, expenses are.


In the current situation where he saves just Rs.2,000/- against his expenses of Rs.38,000, savings as a percentage of expenses is just 5.2%.  Let us now assume that he decreases his expenses by Rs.5000, instead of looking out for a new job. He will have Rs.7,000/- as surplus now. His savings in relation to his reduced expenses would be then 21.2% - a major improvement.


Now let us say, he does not want to touch the expenses. He jumps to another job offering Rs.5,000/- more. His savings are Rs.7,000/-, even here. But in relation to the expenses, it is only 18.4%.  Even here, if one wants to maintain the same savings to expenses ratio, the salary increase needs to be Rs.8,060/-, instead of Rs.7,000/-.


When a person takes the proactive step of reducing the expenses, which are threatening to spiral out of control, the basic problem is addressed and hence the future situation would improve. When the shortcut of a job switch is opted instead, without addressing the core problem, it will at best be a temporary measure. The festering problem would show up again probably in a more serious form and may require an operation!


When expenses run amok, you need to see it in the eye and tame it. Else, the animal becomes the master and the master, the slave.   





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