Recently I have noticed a strange pattern. My impulse spends have started to increase dramatically.
Almost once, every three days, I order something from Swiggy at midnight (though I have had my dinner!). There are many things that I have bought from Amazon which I hardly use. My wardrobe is expanding perennially, thanks to no-reason sales which e-commerce companies dish out almost everyday. I have a constant itch to buy some new electronic gadget – amazon stick, one plus phone, amazon echo, wireless earphones, speakers etc.
Even if I don’t have the money, I don’t feel like postponing the purchase. The credit cards have slowly started to make me think “No worries, buy now and I will pay this off next month or put it in EMI”
If you step back and think about it, this is just the beginning.
I think “saving money” will become extremely difficult going forward led by a host of factors such as
- Social Media
- Given how easy it is to peek into our friends lives, we start comparing our lifestyle and spending habits to others via social media and end up spending money to “keep up with our peers and our increased aspirations“
- Digital Money
- In a behavioral concept called “Pain of paying” though the amount is the same, it feels ‘less expensive’ and “less painful” to pay with the card or digital wallets compared to cash. More money tends to be spent due to the reduced pain of paying.
- Easier Loans + the new world of EMIs
- The credit card companies, banks, the Bajaj Finances of the world etc are all after us to provide us quick loans to buy anything ranging from cars, bikes, gadgets, clothes etc
- Marketing is designed to convince us that we’re deficient in some way, but that we can ‘fix’ ourselves if we purchase their product
- The marketers have now gone to the next level, where they have started to peep into our brains to study exactly why we buy and how to manipulate them. This emerging field is called neuro-marketing.
- Unbelievable convenience
- With the advent of delivery right at our doorsteps and one-click payments from our mobiles, its become extremely convenient for us to spend more.
If it is this difficult to save in 2018, what hope do we have for 2028?
While who we are up against is scary, we still need to put up a decent fight. And here is how I am going about with it..
My first blunder ..
When I started reading on how to solve this, the solution was simple:
Whatever can be measured, can be improved
So the initial idea was to actually track my spending so that I know where I spend. Once this is clear, I can improve on it.
Now to do it manually would be a tall ask.
Thankfully, I found an amazing app called “Walnut – Expense Tracker”. It automatically picked up my spending by reading the SMS sent by my bank.
While it worked like a charm and I diligently used it for three days, the whole process was extremely boring and I had zero motivation to do this daily.
My willpower soon gave up and I stopped using the app.
If you are one amongst the elite few who are extremely disciplined and have great willpower this app will work for you. I am unfortunately a part of the “rest-of-us” category.
Learning: Any behavior which requires willpower to execute, each and every time is not a viable long term strategy
So this time, I decided that I needed a strategy which is completely automated and saves me from decision making each and every day on where to spend.
Introducing the “FISH” method of saving money..
FISH simple stands for:
F – Fixed expenses every month
I – Investing for the long term
S – Short term savings
H – Happy to spend
Let me explain:
First your salary will come to your primary savings bank account. Then it will get split into the following buckets.
1) Fixed Expense:
All of us have certain fixed expenses every month, that we cannot avoid. For eg
- House Rent
- Electricity Bill
- Internet Connection
- Mobile Bill
- Maid Salary etc
Approximately estimate the total fixed expenses. Add a 10% buffer. As there will inevitably be something which surprises you or you exceed in some categories.
This portion will continue to remain in your actual salary account.
2) Investing for the long term
This portion is for investing in your long term goals (early retirement, kid’s education etc). You can take the help of a simple online financial planner to estimate how much you will need to save.
If that sounds like too much work, a good thumb rule is to have atleast 20% of your monthly salary in Long Term Investments.
Set up an investment account in any of the platforms available and start an SIP (systematic investment plan) in few good equity funds.
You can refer here to see how I do this.
3.Short term savings
This portion will cater to any reasonably large financial requirement (say >6 months salary) that you foresee in the next 5 years. You can take the help of a simple online financial planner to decide the amount to save every month.
Otherwise, a good thumb rule is to have atleast 10% of your monthly salary in Short Term Savings
This can be invested via an SIP in options such as
- Ultra Short Term or Short Term Funds
- Arbitrage Funds
- Equity Savings Funds
4. Happy to spend
The remaining amount is all yours to happily spend.
So just transfer this to your secondary bank account (open one if you don’t have) and start spending from this account.
Here is a pictorial snapshot of the entire process:
Do this segregation at the start of the month, once your salary is credited. Once you become comfortable, automate most of this process.
Since the fixed expenses cannot be completely automated, whenever you are spending on a fixed expense use the primary salary account debit card. For discretionary spends use the secondary savings account debit card
What if there is a sudden unplanned expense?
I usually maintain an emergency fund which is around 5-6 times my monthly expenses.
So if there is a short fall in my “Happy to spend” account, I will dip into my emergency fund and replace it later (mostly when I get a bonus).
And try not to use a credit card, as it defeats the whole strategy.
Why does this work?
1.Difficult to think about Opportunity Cost
Behavioral economist Dan Ariely has an interesting observation:
Money is all about opportunity cost.
In English, it means every time you order something in Swiggy for Rs 400, you are giving up Rs 400 which could be spent on something else.
In an ideal world, we should be asking ourselves all the time ‘Is this the best possible way to spend Rs 400?’
But let’s be honest. It is hard and impractical to think about each and every spending decision this way.
Instead of worrying about if we are spending right every time, the idea is to prioritize what is important to us (entrepreneurship, early retirement, kids education etc). In this method, by first allocating some part of our salary to this priority portion via long term investing and short term savings, we are eliminating the possibility of our impulse purchases affecting our important priorities in life.
Earlier when I used to manage money, I always saved whatever was left at the end of the month. So whenever I decide to spend, I always anchored to the entire salary amount which was sitting on my bank account. This meant for a lot of spending, I actually didn’t worry too much as the overall balance in the salary account was still large.
The moment I switched and started to first allocate to the fixed expenses, long term investing and short term savings, it let me anchor to a lesser value in the “Happy to Spend” account. So whenever I am about to spend, my reference point is not my entire salary but only 20% of my salary (or whatever is your % of salary that goes to “Happy to Spend” account).
This goes a long way in helping us make better spending decisions as the
“Happy to Spend” amount is all that we have, to spend for the entire month.
3. Lesser no of decisions
Eventually once you automate the whole process, your no of decisions are dramatically reduced.
Long Term Investments and Short Term Savings, once it is set, you don’t need to decide what to do each and every month
Further, analyzing your spends become a breeze as all you need is to check the primary savings account for fixed expenses and secondary savings account for your other spending.
No fancy apps required. Just your bank statement!
While this method is still in evolving stage, it has worked reasonably well for me in the last 6 months. Do not let the simplicity of the method undermine its usefulness.
If you are struggling to control your spending and saving, I request you to try this simple method and let me know how it works.
As always, happy investing or rather happy saving!
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