A few days back, in a Reddit discussion on savings and investment, I saw someone ask whether others in the group also found themselves saving more after they started investing. This person said that when he never invested, he would spend a lot of money on useless small expenses that could well be avoided. However, after he started a regular investing plan in a fund, just by monitoring it and seeing it grow, he found himself having a higher awareness of his financial situation. As a result, he started spending much less on useless things and started saving more. A number of others in that discussion also said that something similar had happened to them.
This is a very common experience.I have seen it in several of my young colleagues at Value Research. At some stage, money is mostly a way to buy the next mobile phone or planning for your first car. Then, those who start investing typically in an ELSS for saving tax start thinking of money in a different way . They have less to spend, so they become more aware of what they’re spending. When they don’t spend, they tell themselves that it’s better because the money is growing. And then they want to save even more.
I’ve lost count of how many young people I have seen this happen to.They start with a small saving, typically just for tax-saving. And then, in no time, they start saving more.But here’s the important thing this doesn’t happen to those who mechanically put in some money into PPF or some other tax-saving deposit at this time of the year. The 15 year lock-in and the lack of any upside surprise means that such savings don’t make investors out of savers, which happens only when a few conditions are met. One, regular investing, as through SIP. Two, an asset class that has potential for an upside surprise. Three, a sufficiently short lock-in period, something whereby a young person can look forward to reaping the rewards of self-denial.
It’s the combination of all three that makes people invest more after they start investing. All this ties in with what I believe is the biggest problem in people saving and investing. If you were to read through what is thrown on your face every day in the media, then the dominant message is `SPEND!’. There’s almost nothing where the message is `SAVE!’. If you do come across whatever is published about investing, then it would appear that the biggest problem in investing is deciding where to invest. However, that’s actually a secondary problem.
The biggest problem is that many people don’t save, or don’t save enough. Whatever they do save, they do it without real awareness, without projecting into the future, and thus without triggering the thought process that would lead them to save more and save better.All of us in the investment media are culpable because we try to focus so much on where to invest. This sends out a subconscious message that if your savings are not growing to some level that you want them to, then the way to solve that is to find a better investment. However, the true answer is: most savers don’t save enough. Over the last few days, those of us who watch TV would have seen ads from a campaign that the mutual fund industry has jointly launched to promote its product.Of course, there are individual fund companies that advertise their product. This is a good example of the kind of media message that needs to go out. This campaign was born out of Sebi’s insistence that fund companies spend on investor education. This is a good example of the kind of message that’s needed.