Earning well but not investing enough?

Do you think you earn well but are unable to save or invest enough?

The paycheck is big but monthly investments are not commensurate.

With my limited experience, this is not an uncommon problem.  

And the worrisome part is many of us can’t exactly figure out or explain to a friend/adviser why that is the case. Where is the money leaking?

As an adviser, I regularly come across investors who express such concerns.

In this post, let’s revisit basics about saving money and the concept of budgeting. Our money habits are deep rooted. You have to get out of your comfort zone and take those extra steps if you want your money to work for you. If you are indeed struggling with your savings, I also discuss a simple approach about to how to start tracking (and managing) your expenses. This can help you save/invest more.

How to save with discipline?

A way is to set up recurring investments (SIPs, RDs etc.) at the start of the month. Thus, the money gets invested right after the salary gets credited to your bank account. And this forces us to manage the rest of the month with whatever is left.

However, I have noticed that many investors are too conservative in deciding the monthly investment amounts. For instance, you are earning Rs 2 lacs per month but investing only Rs 20,000 per month.

Well, the nature and structure of your expenses may be such that you have very little left to invest. However, based on my limited experience, this is not always the case. Based on my interactions, I have observed that investors struggle to figure out why they can’t invest more. They know that they are earning well but somehow unable to invest the expected amounts.

In other words, they do realize that they should invest more (given their income levels) but cannot invest as much. Clearly, they are spending more than they think but can’t figure out where the money is leaking.

Budgeting: What gets measured gets managed

Have you ever tried to assess how much you spend every month? Or tried to analyze the various expense heads?

The first step towards managing your expenses is to measure those expenses. The formal name for this exercise is Budgeting.

You can’t take any action until you understand where your money is going.

There are 4 kinds of foreseen expenses.

1. Non-discretionary (Monthly): House Rent, EMIs, utility payments, medicines, classes, groceries, fuel etc.
2. Discretionary (Monthly): Eating out, shopping etc.
3. Non-discretionary (Non-monthly): Kids’ school fee, insurance premium payments, maintenance charges, birthdays, etc.
4. Discretionary (Non-monthly): Travel, shopping etc.

I assume you have an emergency fund for unforeseen or sudden/unplanned expenses.

How to measure (track) your expenses?

I am sure everyone has his/her own unique way of tracking expenses. No need to change if it is working for you. However, if you are worried about your investment ability but are still not tracking your expenses, you can consider the following approach.

#1 Go cashless

When you use cash, it is difficult to track expenses.

#2 Open a secondary bank account

At the start of the month, transfer money from your primary bank account/salary account to this bank account. Spend only from the secondary bank account. These days, UPI is accepted almost everywhere in India. You can link your secondary bank account to any of the popular UPI apps (Paytm, GPay, PhonePe).

#3 Always pay from your secondary bank account

Use primary bank account only for transfer to secondary bank account or for investments. Rest all payments must be made from the secondary bank account.

Yes, you may not always pay from your secondary bank account. You may want to use a credit card for discounts, cashbacks, or reward points. In that case, just make sure that you pay the credit card bill from your secondary bank account.

Further, it may not be possible for everyone to go cashless completely. You may have to make some payments in cash. However, if you need to withdraw cash for anything, withdraw from the secondary bank account.

#4 Just add up the numbers

At the end of the month, you just need to add how much you have transferred from primary bank to the secondary bank account in that month.  This will tell you about your expenses for that month. You continue this exercise for a few months. And you will see a trend of expenses emerging.

This is the first step. You know how much you spend every month. And this is based on data (and not what you think).  Sometimes, this comes as a surprise to many investors. That they are spending so much every month. Just this awareness can go a long way in curtailing expenses.

For instance, if you see you are spending a lot, cancelling paid subscriptions you no longer use is a low hanging fruit. Instead of driving alone, you may use a carpool going forward. You may decide to dine out less.

#5 You have real time information about how much you have spent this month

There is an additional benefit. With this approach, you have real time information about how much you have already spent in the current month. You just have to calculate the following: Money Transferred to Secondary Account – Balance in the secondary account.

If you have gone overboard this month, this information alone would bring in some discipline. You may aggressively cut down your discretionary expenses.

#6 Dig deeper and classify expenses

Next, classify spends under various expense heads (or sub-heads). How do you do that?

This will require some work. No free lunch.

Though there are apps that claim to help you with that, Excel (or any spreadsheet software) is an easy option. At the end of each day (or every few days), add expenses to the sheet and classify under various heads and sub-heads (as mentioned above).

You can’t do much about non-discretionary expenses. But you may be able to cut down on discretionary expenses. For instance, if you figure out that you are spending too much on visits to malls or eating out, you can reduce the number of visits.

You can also set sub-limits on how much you will spend under various heads.

#7 Make your cashflows sweat

This is a generic point.

If you take the approach of investing what is left after spending, you will never save/invest to your full potential. You will somehow find avenues to invest.

That’s why scheduling recurring investments in the first week of the month can be so helpful. Having a limited amount of money left for the month, you would try to optimize and prioritize.

I do not mean that you should stop enjoying life and focus only on savings. That makes absolutely no sense. And this can happen if you invest too much. But you must strike a balance. For instance, if you are stretched for cash but want to spend it on recreation, you may want to spend on areas that offer lasting joy and memories such as travel. Or go slow on activities that offer only fleeting fun such as visits to malls or dining out.

These non-monthly expenses can create a lot of confusion

You may be struggling to invest to your maximum potential because non-monthly expenses keep you confused sometimes. Yes, not all your expenses have a monthly frequency.

There are expenses with a different periodicity. Common examples: kids’ school fee, insurance premiums, birthday celebrations, gifts, maintenance charges where the payment frequency may not be monthly.

You may keep the money in the bank (and not invest) because you see such expenses coming up soon.

From what I have observed, we tend to retain too much in the bank account (than is needed to meet those expenses). And the way things work, the money in the bank account usually gets spent.

An option is to note down such (non-monthly) expenses and the periodicity (tentative payment dates) and plan for such investments through investments.

Let’s say you must pay Rs 50,000 per quarter towards kids’ school fees. Instead of keeping the money in your bank account, invest Rs 16,500 per month into a RD, liquid fund, or an arbitrage fund. After 3 months, when the payment comes due, you can redeem the investment and pay the school fee. You can use this approach for other similar expenses such as insurance premiums.

This helps you in 3 ways.

1. You dig deeper. To start a recurring investment for any expense, you would try to get a better sense (estimate) of that expense. This awareness is a very big step.
2. Reduces anxiety. You do not have to worry about such payments because you are already planning for such expenses.
3. Invest more: As your anxiety is taken care off, you may feel more comfortable investing as much as you can. Thus, you may be able to invest more.

EMIs can sometimes help

Let’s say you invest Rs 50,000 per month for long-term goals. Your cashflows may be tight, but you do not want to compromise on this investment.

Suddenly, one month, you get an unplanned expense of Rs 50,000.

How do you manage this?

You have 2 options here.

1. Dip into your emergency fund. And replenish the emergency fund gradually over the next few months.
2. Skip your SIP for the month. Decent option. Your cashflow will be in balance but the long-term saving for that month is forever lost.

There is a third option too. May sound blasphemous, but we must focus on the long-term good.

Instead of paying Rs 50,000 one shot, what if you had to pay Rs 4,500 for the next 12 months. You can do that through a personal loan, converting credit card spend into EMIs, or even through an overdraft facility.

At 13% p.a. a loan of Rs 50,000 will have an EMI of Rs 4,465 for 12 months. Over the next 12 months, you will pay Rs 53,590. Rs 3,950 more than the purchase amount.

If you have to pay more, how does this approach help then?

Two ways.

1. The SIP of Rs 50,000 is not interrupted. Thus, this sudden expense does not impact your long-term savings.
2. Again, the way most of us manage money, this EMI of Rs 4,500 per month may not increase your monthly expenses. You may cut down upon some of your discretionary expenses over the next few months.

I do not deny EMI interest is an additional outgo. However, if incurring a small interest cost can increase your investment discipline, I will probably be willing to pay that cost. As with everything in life, you must weigh the costs against benefits.

While I share the above contentious suggestion, I must say credit must be used responsibly. Access to credit (loans, credit cards etc.) gives you the power to spend money that you do not yet own. At the same time, all loans must be repaid.

If you can’t repay the loan on time, you will only compound your money problems. Credit is a powerful weapon in the hands of a responsible borrower. However, if used irresponsibly, it won’t be long before you fall into a debt trap.

How do you measure or manage your expenses? Do let me know in the comments section.

Disclaimer: Registration granted by SEBI, membership of BASL, and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors. Investment in securities market is subject to market risks. Read all the related documents carefully before investing.

This post is for education purpose alone and is NOT investment advice. This is not a recommendation to invest or NOT invest in any product. The securities, instruments, or indices quoted are for illustration only and are not recommendatory. My views may be biased, and I may choose not to focus on aspects that you consider important. Your financial goals may be different. You may have a different risk profile. You may be in a different life stage than I am in. Hence, you must NOT base your investment decisions based on my writings. There is no one-size-fits-all solution in investments. What may be a good investment for certain investors may NOT be good for others. And vice versa. Therefore, read and understand the product terms and conditions and consider your risk profile, requirements, and suitability before investing in any investment product or following an investment approach.

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