Lessons in financial plumbing

Arjun Nair, an advertising industry executive in his late 40s, has been suffering from what I call the ‘Financial Leakage Syndrome’. Although he earns an enviable INR 24 lakh per year, post tax, he finds it difficult to save a single penny. His argument: “Life has become so expensive, plus these taxes and loan EMIs are killing me”. His wife, Deepa, however disagrees with Arjun and says that this has been the case for the past 20 years of their marriage. She strongly felt that they could save much more as a family. I agree with Deepa and believe that there are several ways in which they could have cut down on their financial leakages.

The starting point was to look at the monthly inflows and outflows of the Nair family. Overall, things looked fine. There were common expenses such as home loan EMI, daughter’s college and tuition fees, groceries, transportation, utility, entertainment and vacation. But when we drilled down further, we found that his branded alcohol and cigarette intake was costing him around INR 2 – 3 lakh per year. His monthly alcohol intake was costing him around INR 14,000 [which included occasional consumption in restaurants] and cigarettes around INR 4,000 per month. Besides this, they ate out twice a week on an average, which cost them INR 2,500 per week. Three visits to a multiplex in a month clubbed with shopping cost another INR 10,000. It doesn’t seem much on the surface, but add the numbers and it comes to INR 30,500 per month. This is excluding the vacation and other lifestyle expenses of the family.

Let us see how much he could save if he plugged some of the leaks.

A pack of branded cigarettes costs around INR 100 today. A 50 per cent cut in consumption, is not only good for one’s health, but also helps build a corpus. Similarly, a 180 ml bottle of alcohol costs around INR 165 [I am referring to Indian whisky, foreign brands are certainly higher]. Halving the consumption here too will translate into savings. A movie ticket at a multiplex costs INR 300 per person [the same would cost INR 100 for a Sunday morning or the 11:30 am show].

Through the Nair family’s example, what I am getting at is when you are left wondering where all the money went at the end of the month, the first thing you need is an exhaustive [and honest] list of all your expenses. Then identify expenses, which you can easily cut down. If you get defensive about cutting down on the expenses, just think of how much you would make if you invest the money rather than spend it on something you don’t really need. Going back to the Nairs’ example, if Arjun invested the INR 7,000 he spends per month [after halving his consumption] on alcohol for 10 years, he would get INR 16,10,271 and after 20 years it will become INR 69,24,787. The table accompanying this article will help illustrate my point better.

Although I agree that Arjun’s scenario doesn’t apply to all, the point is that each one of us has some quirks or habits that slowly drain our corpus.

Take a look at typical sources of financial leaks that most people are exposed to:

• Addiction to cigarettes, alcohol, expensive foods and drinks
• Not switching off heaters, air conditioners and electronic equipment after use
• Buying on credit and making only minimum payments on credit card outstanding balances
• Keeping money in low interest savings accounts and fixed deposits, and at the same time, keeping high interest loans.

It is perfectly fine to have occasional indulgences, but if you are addicted to certain items that do not seem to cost a lot of money now, some financial plumbing might help. The whole idea is to either seal the leaks completely, or run a tight ship, so that these leaks don’t sink your financial ship.

Savings are the building blocks of wealth creation and you must keep aside a portion of what you earn today, no matter how poor or how wealthy you are. Your lifestyle should match your current income, savings and financial situation. Else, some day these financial leakages will take you down. Spend but commit to ‘spending’ a certain amount of your income on investments.

By ‘spending on investments’ I mean that you must set aside a savings budget every month and consider that you have spent the money just like you spend on things; you need to forget about it. ‘Spending on investments’ should be your mantra before you spend on anything else. Even celebrities such as the late Michael Jackson, Mike Tyson and Bollywood stars of yesteryears went down financially as they forgot the cardinal rule of managing money: spend wisely or any income, no matter how high, can be spent completely.