The unique power of force

Manisha bai
Manisha bai, Mumbai

“Don’t save what is left after spending; spend what is left after saving” – Warren Buffett

I recently met a friend’s home maid, Manisha bai, to understand her savings and money management. She does not have any savings till now, neither in cash at home nor in her bank account. Her earnings are only enough for her and her family’s day-to-day living expenses, she said. When she needs more than what she earns, she often loans money from a local jeweler by leaving her jewelry as collateral.

What surprised me though, is that she has never failed to pay back these loans (along with interest) on time. When it comes to loan repayments, she is able to save enough money to pay back the loan’s principal and interest amounts. On the other hand, when asked whether she saves money otherwise, she said her earnings are only enough to meet her expenses – nothing more. How is that possible?

The psychology of savings

Most of the people can rarely control their impulses to spend. When there is cash in hand, we keep spending money everyday only to realise towards the end of the month that we have spent it all. Then we wait for our next paycheck – and the cycle goes on. Manisha bai too, like most of us, falls prey to her impulses of overspending. She could only save when forced to save for repayment of her loans, not otherwise.

I asked Manisha bai if she will be able to manage her living expenses if her monthly salary was reduced by Rs. 1,000. Not surprisingly, the answer was yes. She would reduce her expenses and discretionary spends if that was the case. She would find her way through it, if she was forced into such a situation. The beautiful power of force!

Saving money is a game of psychology.

We often convince ourselves to spend money on things that we simply don’t need. Saving money requires awareness of the unconscious triggers that lead to spending. One way to know this is to make a list of all the expenses and evaluate how much money was spent on things that were unnecessary or seemingly innocuous. Maintaining a log of expenses to track your spending can dramatically change the way you spend. One can then decide to budget accordingly, cut down on the avoidable expenses and save money at the end.

However, like Manisha bai, we are all slaves to our impulses. Frugality does not come easily to anyone. As I mentioned above, saving money is a game of psychology and you have to beat your impulses to it. How does one effectively do that? By using force.

Just automate it!

In today’s time, automation can prove to be a unique form of force. Automating investments force you into developing a savings habit. Humans are bad at accounting for expenses mentally, and hardly anyone maintains a log of their expenses. Even when they do maintain a log, they tend to overspend when they have money at their disposal. However, automated savings at the start of the month means you put a hard-limit on how much you can spend from the very start. And that’s the best way I know to beat your brain and impulses to save and invest.

Investing in mutual funds through Systematic Investment Plan (SIP) is a solid way to automate your investments. In an SIP, a fixed amount is automatically deducted every month from the bank account and invested in the selected mutual fund. The direct debits force one into developing a savings habit.

Is force good? Yes, if it makes you feel secure about your finances and prepares you for a rainy day, why not? Saving money can often feel like an exercise in sacrifice and self-sabotage, especially for the low-income groups. After paying for all the necessities, it can often feel like there is nothing left to tuck away for a rainy day. However, living frugally today can help you live a better tomorrow. Apart from emergencies, everyone has future goals – rich or poor – and everyone needs to save to achieve those goals. In fact, saving especially becomes far more critical for the low-income with low savings. If forcing oneself into frugality is the only way towards it, then force is surely good.

Time magazine, in an article titled “The Boring Secret to Getting Rich” shares this view: the secret to getting rich is to live below your means. Real wealth comes from spending less than you earn, again and again, month after month, year after year. It’s a slow and steady process. It isn’t particularly exciting. But it is the surest way to reach your biggest financial goals.

Warren Buffett is a hugely successful investor, and most of his tips are simple, straightforward and timeless. His quote at the start of this blog summarizes it simply – first save, then spend! How do you ensure you save first? Just automate it!

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