Money isn't everything as long as you have enough
of it. — Malcolm Forbes.
By Altaf Noor
Ali & Ayesha Altaf
Sep 17 - 23, 2001
A crude reality of life is that as long as we live we
need money at every step to take care of ourselves and our dependents.
On the other hand, our earning capacity is not life-long. Unfortunately,
for most of us, our earnings remain constant after reaching a certain
stage and in fact diminishes completely as we enter the retirement age.
The point to follow is that our spending pattern are
life-long whereas our earning capacity is not which makes it very
important for each one of us to learn in life the discipline of living
within our means. Surprisingly our learning institutions teach us many
other disciplines but this one. In the end, we have to learn it for
Quite rightly you may well be one of those prudent
people who pose this question to yourself regularly. However are you
among those who really take the trouble of finding out if you are
actually living within your means?
The best evidence of finding out if you are actually
living within your means is by knowing what you own. In other words, the
result of living within your means is savings which take the form of an
asset such as cash, local and foreign bank balance, amounts receivable
from others, balance in your provident fund, investments in shares,
certificate of investments, saving deposits, house, motor vehicles, etc.
Do take a pencil and paper and prepare a list of assets.
You now need to prepare another list of amount owed
to others such as personal loans, company loans, amounts owed on credit
cards etc. Sum up the list and you get the total amount of liabilities.
From your assets reduce liabilities and the resultant
figure from the above exercise is what you can call your 'net worth'
(Net worth equals assets less liabilities). This figure can be positive,
negative or equal to zero.
If your net worth figure is a positive figure, it is
'an' indication of the fact that you have been living within your means.
Your net worth figure represents the amount that you have been able to
save. However your net worth needs to be related to your age to draw
correct conclusions about its adequacy.
A rule of thumb is that your net worth should be
equal to five to ten times of your yearly income by the retirement age.
Example: Mr. A wishes have an income of Rs. 1,200,000
per annum when he retires after few years. He expects the yearly return
on national saving schemes to be around 12% when he will retire. These
facts mean that at the time of retirement the net worth of Mr. A must be
at least Rs. 10 million so that he derives his target income, if he
decides to convert his money in cash and keeps it in nsc.
If your net worth figure is negative or zero, it
means that you have just joined a huge club of individuals who would
like to follow the advice of living within their means but who need to
bring in some discipline in their financial affairs.
Zero or negative net worth is understandable for a
young person who has only finished studies and started earning. However,
for a person in his thirties low net worth should be cause of concern
whereas for a person in his fifties or above, it can be a source of
absolute financial insecurity. The underlying lesson is that the earlier
you start saving and building your net worth, the better it is.
Improving net worth:
There are three major strategies for improving your
net worth. The first is to earn more, the second is to reduce your
spending and the third is a combination of earning more and spending
May be at this instant the most practical and
result-oriented strategy for you is to reduce our spending. After all
every rupee saved is a rupee earned. Here is how to do it.
Eliminate expensive debt:
Your recommended first priority should be to repay
the money borrowed on high interest rates. A sense of urgency on this
front will reduce the outstanding amount with every repayment. Equal
important is that it will neutralise the high financial charges for
'renting' these borrowed funds.
The exercise of ranking liabilities in terms of
percentage per month (or annum) on unpaid balance will start from
referring to the list of liabilities prepared for finding 'net worth'.
Our goal is to identify the funds that are costing us the most so that
we can repay them to reduce our spending on financial charges.
Unscrupulous credit card lovers can rightly expect the balances
outstanding on credit cards to feature prominently in the list for
You need to make yourself understand that any further
increase in the amount owed by you today will bring you even more
financial misery tomorrow. If necessary, vow to 'freeze' the existing
balance. Resist the temptation for reaching to your wallet and taking
out your credit card if they are in your list. You also need to focus
your attention on how to bring the outstanding amount to zero.
A basic method for computing monthly repayment figure
is to take the total outstanding amount and divide it by convenient
number of installments. For example if Rs. 100,000 is payable on your
credit card, it can be divided in installments of Rs. 10,000 each. It
will take you at least ten months to repay the whole amount. The term
'at least' recognises that the outstanding balance will continue to
attract financial charges but each repayment will result in lower
financial charges in the next month. You must be aware that it will take
you more than ten months to clear the balance.
Once you repay the balance in full and make it a
habit to clear the balance in full every month you will find that a
credit card statement appears to be at its best for a credit card holder
without debit balance from previous months and financial charges. I
actual know a person who invariably deposits more than the due amount on
his card, to take care of his future purchases. His previous months'
balance is in credit rather than a debit balance (amount owed). Most
people, however, dread the day the card-statement arrives in the mail.
They do not even feel like opening it. The note of caution here is that
the blind love affair with credit cards can be expensive and its always
recommended that you remain loyal to only one credit card at a time.
Have the audacity to cancel the rest.
Another option available to you to reduce your
financial charges is to be on a look out for replacing expensive debt
with a less expensive one. The balance transfer facility offered by
various banks can be useful in replacing debt owed on credit cards.
The moral of above story is to start repaying high
cost loan immediately, and stop only after reducing your liabilities
significantly. If you devote some time in preparing net worth statement
at regular intervals, you will find that your net worth will increase
because of reduced financial charges, all other things remaining the
same. The most recommended strategy for all times is to be debt-free.
Avoid unplanned purchases:
Soft purchases. How many times it happens that we go
out to buy one thing and return with ten different things? It is not to
say that those 'extras' were not required, but the question is that if
they were required so badly how come you did not went out to purchase
them in the first place?
The examples of above situations are buying
groceries, eating out, buying clothes or going out. Have you ever
noticed that we all end up paying almost double of what we initially
estimate in our minds?
The point is that most of us have become slaves to
our needs and harbor uncontrolled desire for immediate gratification. In
this age of communication, the fact is that we are so much bombarded
with consumerism that we are literally seduced by marketing and create
an artificial need and that sure is the most indisciplined phase an
individual can get to. Also common is to find compulsive shoppers who
are restless till the pockets are empty.
The way out is to always prepare a list of items
required with quantities when going out for any kind of shopping and
then sticking to it. No big issue in adjusting the quantities but no
purchases should be made without thinking about it carefully in advance.
There may be thousand other ways to economies on your
each item of your spending depending on situation but stopping to watch
out everything coming with the word 'sale/discount/win a vacation, prize
etc' is not one of them.
The last point that I wish to emphasis is about
'significant but invisible' spending like buying clothing accessories,
stationery, birthday cards etc. By careful of spending money on things
which do not appear to be expensive in isolation but when you add them
up they become 'sizeable'.
Mega and Major purchases. Its again a fact of life
that each one of us is involved in once in a lifetime financial purchase
like buying a new home or major purchases like a car, television, DVD,
stereos, refrigerators, camcorders, cameras, computers or any other
The suggested approach in such situations is to
carefully assess your needs and to think of options. If there is no
option but to buy, the best way is first to go out and see what is
available. Internet is an emerging source of such fact-finding. Even if
you find what you are looking for, try to defer purchasing it for a
week. This one week acts as a cooling period. After one week, if you are
still for purchasing it, then by all means go ahead and buy it.
The key principle here is to defer your major
purchases to the last extent possible. It should not be seen as denial
of something but as a process that eventually benefits you. Even better
is that you share your approach in advance with others involved in the
decision, such as your spouse or children. Such understanding is
critical and will save you from saying 'what the heck, I can afford it!'
and rushing you into a decision which is a dangerous pretension.
Patience is the key word in such decisions. If you hear such statements
often, seriously consider to change the settings of decision to minimise
undue pressure on yourself. If you don't, you will probably give in and
regret one more wish of yours!
Final Word: Spending money is possibly easiest of
things. One can also ignore the importance of living within means and
continue to earn from one hand and spend the same from the other, hoping
to hit a treasure one day. On the other hand, those who accept this
reality prepare to synchronise earning capacity with spending pattern to
save something for rainy days.
By no means our advice for anyone is to be a miser.
Throughout we have emphasised the need to improve the quality of our
spendings by being moderate and vigilant. It is possible to enjoy life
within the confines of its financial realities.