I left college about two decades ago. This was when the internet was in its infancy. Applications were what you filled up and sent in for college or hostel admissions. Personal computers were a luxury. Mobile phones were unheard of. People invested in fixed deposits and post office schemes or bought life insurance.
Things didn’t cost as much, including college. So, perhaps people of my generation didn’t think a lot about scientific investment approaches. You hoped to get a job with good benefits and decent growth and you hoped that would take care of your short- and long-term needs. Today, I am a vice-president of technology at one of the world’s largest banks where wealth and investment management is a whole line of business, and there are some things I certainly wished I had known about money when I was back in college—discipline and the power of compounding.
My approach to money should have been like a bear prepping single-mindedly for hibernation. A bear instinctively knows that there will soon be a time when it will be unable to hunt for food and even if it is able to, there won’t be any food sources available. So, it eats and eats and eats while it can and builds reserves of energy that allow it to get comfortably through the brutal winter while hibernating or entering a state of torpor. Here’s why the outlook towards money needs to be very like that, with financial independence as the ultimate end goal.
In college, you are perhaps staying rent-free with parents, or they are paying for your hostel or other accommodation. Most basics such as food, shelter and clothing are still sponsored by your parents. As college winds to an end, the reality of adulthood starts to sink in. You know that you will need to support yourself soon.
The immediate goal is to start earning. How you do this is aligned with your risk tolerance. You either do a part-time job, a 9-5 job, or start a business or a venture. This soon takes care of basic needs—you are able to feed yourself, afford conveyance to get to work, and pay a little rent perhaps. Nothing extravagant. There’s just enough income to get by.
Once that is settled, your “wants” surface… you want to get married or begin a relationship. Sometimes both partners are earning. Sometimes only one. You “want” to have kids, and you “want” to take care of them. Your parents are older and retired and probably need help, and you “want” to take care of them. Your “wants” get fancier. You “want” a bigger house, a bigger car, that expensive watch, a pricey vacation… It starts to add up. I wish I had known back then about proactively managing my career so that my income grew in line with my wants. And in order to grow my career, I wish I had known about the “need” to upskill.
This income-to-expense balance needs to be very like calorie management to lose or gain weight. To lose weight, calorie intake needs to be lower than calories expended, and just the opposite to achieve weight gain.
Similarly, income needs to stay ahead of expenses to create a surplus in the form of savings. Let us say this happens and savings continue to accumulate. All well, right?
Not so… Simply building savings is like losing weight, but a slim you is not necessarily a healthy you. To be ready for the future you, the savings need to become a healthy nest egg. And for that, these savings need to be put to work to earn more money. How you invest again depends on your level of risk tolerance; investment strategies is a whole different topic though.
All this is fine, but what’s with the discipline? Very like the bear that eats non-stop to accumulate energy before winter sets in, you must maintain the discipline of keeping income ahead of expenses, keeping expenses within one’s means, and continue to grow savings over the period from college to retirement, preparing for the long winter, so to speak.
Save a fraction of income every month starting from day one, even if it’s a very small amount, increasing the fraction gradually over time.
Whenever there’s a rise in income, focus on increasing savings proportionally.
All this leads towards financial independence, which eventually gives you flexibility, both in your career and life. And isn’t that what we all want? So, go ahead, embrace the bear in you.
Shalini Thadani is vice-president, technology, at Wells Fargo, India & Philippines.
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