But does your spending prevent you from saving? If it does, you have a problem at hand. Fortunately, understanding and applying behavioural psychology can help you moderate your problem. How is that possible? Investments and Saving habits - which one is dependent on the other?
This is simple to reply as any layman would say that it is ‘investment’ which is directly dependent on one’s saving habits. Rightly so, because if you save, then definitely there will be some money available for making investments and conversely if you don’t then there is no way you can invest because there is no money. Similarly if you can save more, then the quantum of investments you can make will relatively be larger from the time you saved less.
So effectively one can safely say that the direct determining factor for our investments is the saving habits. If you can recollect the topic of my last week’s published article, which emphasized on ‘thinking differently’ if someone wants to become rich, then can we apply this philosophy of thinking differently on the just explained relationship between investments and saving habits? We know the traditional line of thinking on it which states that our investments are directly dependent on our saving habits.
Is there a possibility to challenge this statement? There might be, if we try hard to think differently. Have you got the answer on it? I am sure you have the one. Assume you have poor saving habits and by the time you reach the end of a month there is hardly any surplus amount left into your bank a/c which can be considered for any sort of investment.
Let us say I suggest you join a ‘Salary Saving Scheme [SSS]’ under which every month there will be a compulsory deduction of a certain amount from your monthly salary and the amount deducted will get invested into a financial instrument of your choice. Are you a bit uncomfortable hearing this, because now onwards every month there will be less money at your disposal to spend?
Despite consistent deduction of this nominal amount from your monthly salary, I am sure you will manage your monthly expenses without making any great compromises in your lifestyle. I agree that you may have to make small adjustments here and there but more or less things will remain as usual. But the most remarkable thing which you will achieve under this mode of forced saving is - “consistent growth in your investments”.
How did you achieve this despite you having low saving habits? It is simple, because you started thinking differently when it comes to your investments and saving habits. Linking savings to your spending decisions limits your consumption each month. How? If you spend Tzs. 1 million and save 10 per cent of it, you have brought down your total cash balance by Tzs. 100,000/-. And remember, you can only spend using available cash!
The objective is to set aside money from your current income. Tell us whether you find noticeable difference in your spending habits after you follow this process. And remember to transfer your savings into investments at the end of each month! Creating a Savings Habit gives us options in the future. The big difference between savings and investments is “time”.
“Savings” is the money you set aside for future - a short-term goal. It is typically more accessible, and if in a savings account, usually very safe. However, in order to meet long-term goals, it is important to consider investments. Investments will allow you to earn returns at a specified rate that can make your money to grow consistently.
See How Time Affects The Value of Money! That is why savings and investments go hand in hand. Thus, you need to align your investments to your saving habits. If you spend recklessly and regret not saving, you can start an auto debit facility from your bank account, which directs money to investments before it is available to spend.
If you have a surplus before the next salary comes in, deploy the balance at the end of the month. Alternatively, you can join a ‘Systematic Investment Plan [SIP]’ with an option of auto electronic transfer of money into your investments folio. This small change in your thinking will go a long way in making you financially independent - cheers!!!