What important financial rule do most people break?

Lets start with a character.

Rohit recently completed his engineering. He is placed in an IT firm with an annual package of Rs. 7.2 lakh ($ 10,000). His take home after tax income is Rs 50,000 ($ 700).

Rohit said, “Hey Sahil! I have got a new car.”

I said, “Congratulations! That’s cool. Which car did you buy?”

Rohit,“ I always dreamt about Honda City since my engineering days. Hence I got my dream car.”

Image source: google

I said, “But you recently started your job. How did you manage to get the money to finance the car?”

Rohit, “I got it on EMI with 90% loan. The EMI comes out Rs. 20,109 ($ 282) for 6 years.”

I said, “But that’s a lot of money. How much do you save monthly?”.

Rohit, “Saving? Bro, I am just 24 years old. I have my entire life to save. Moreover, I want to enjoy my life for the next 5-6 years. It is too early to think about savings.”

Fast forward 6 years when I met Rohit in one of our common friend’s wedding.

I said, “Hey Rohit! Congratulations! I heard you got married. How is life?”

Rohit said, “Thanks, Bro! Everything is good but there is only one problem.”

I asked, “What?”

Rohit-“It’s been 6 years since I started earning. My package is now Rs 15 lakh ($ 21,200). But the problem is that I have not saved anything yet. Now when I plan to save, I find that even 1 lakh ($ 1413) a month after tax is less for my expenses. I am not sure how to manage my expenses. I don’t know even after earning so much, I do not have any wealth. I am paying EMI’s and living paycheck to paycheck.”

This is a common problem across the world!

The common financial rule that most people break is not to develop “habit of saving”. It sounds cheap! It sounds UNCOOL!

• Most of the people live paycheck to paycheck with most of their salary spent in their expenses.
• The biggest problem is that they don’t have any control over their expenses. They just spent money on credit card and keep paying the credit card bills.

They don’t understand that:

• It is not about being cheap but it is about developing a habit of saving and investing.
• It is about investing in assets and not in liabilities.
• It is about spending in limits!

I am not saying that one should not get a car or one should not go on vacation. However, it is about knowing the limits.

The entire idea of spending today and saving tomorrow never works. The reason is that these young people never develop the habit of savings. Their lifestyle is such that they always run out of cash.

If they get an increment and hike, they spent it on fancy dinners and vacations. Then they wonder, where is the money going!

On top of that, they lose out on the 8th wonder of the world (according to Albert Einstein) - Power of Compounding.

Just to explain the power of compounding-

If Rohit had started investing Rs 10,000 ($ 140) a month when he started earning from the age of 24 and invested for 10 years till the age of 33. He would have made Rs 12 crore ( $ 1,700k) by the age of 60 at the rate of 15% annual return with a total investment of Rs 12 lakh ($ 17k).

Whereas, if Rohit would start investing by 33 till the age of 60, he would make only Rs 4.5 crore ($ 636k) with a total investment of Rs 33.6 lakh ($ 47.5 k) for 28 years.

Do you want to make 12 crores ($ 1,700 k) with a habit to save Rs 10,000 ($ 140) per month for 10 years or do you want to make Rs 4.5 crore ($ 636 k) by investing Rs 33.6 lakh ( $ 47.5 k) for 28 years?