Source/Contribution by : NJ Publications
Have you ever asked yourself – what has all the technology advancement and development around brought us? Has it really added value to our lives? Has it added happiness, contentment and sense of security to us?
It would be a true eye-opener if we could ask this question to us every now and then. Those past their 30s would fondly remember the good old days when we had little possessions but also little to worry about so many things in life. We had plenty of friends, relatives and time to enjoy life. Were we not happier then?
Recently, there was a whatsapp forward which made me wonder about these things in life. Of course, there are many advantages of modern life which we could even dream off few decades back. Technology advancement and development and impacted every bit of our lives, be it medical care, communication, entertainment, education, travel, work or the daily comforts in our life. It has surely made our lives more comfortable and without boundaries.
The past few decades have also seen an alarming change. Wealth and income inequality has increased anywhere in the world despite substantial geographical differences. Today, the richest 1% are twice as wealthy as the poorest 50% put together globally. Unfortunately, the rising income disparity is true even for India. There is much evidence that rich are getting richer and poor are getting poorer, everywhere.
There is a visible change in our society happening in the past few decades. Families are growing smaller and more distant. We are becoming more commercial in our social dealings and there is much materialism which is evident in almost all aspects of our lives. True, the income opportunities may have increased for many but only a few have managed to increase their wealth substantially. In this article, we will focus only on this critical aspect of the modern life which has direct, tangible and measurable impact on our financial well-being.
Why are we not getting rich?
The Savings trap:
Post economic liberalisation in 1991, India pursued a path which encouraged open market and privatisation and capitalism. A change from the socialistic approach which was followed for many decades without visible growth in economy or the standard of living. Post this change, many new industries and markets took birth and prospered. The people who participated in this growth saw their wealth growth. However, a majority of the people did not participate in this economic growth of India.
Between 1979 (base year for Sensex launched in 1986) and now, the Sensex has grown from 100 to 41,150 in 40 years. That's gives us an annualised growth of 16.25% without counting dividends! Your money would have multiplied more than 411 times during this period. However, the only people who benefitted where those were the industrialists, entrepreneurs and the equity shareholders from this growth. Be it due to traditions or culture or awareness or lack of proper markets, a lot of us and our parents avoided equities. We gave our money to banks and government savings plans which gave us a paltry single digit returns.
Even today, equity savings culture has not growth substantially. A lot of us are looking at sovereign or guaranteed investment options which give us negative real returns after tax (real returns is returns less retail inflation). This simply means that even though we feel we are saving money, the fact is that we are eroding or slowing burning our money. The unfortunate irony is that we are happy to get that.
Here is a short example to get this message home. You get returns of 7%. Tax rate applicable is 30%. Your net returns is 4.9%. Inflation in December, 2019 was 7.35% as against 5.54% in November 2019. Even if we consider an average of 5%, for all practical purpose, we are loosing our money by 0.1% yearly.
In short, even though we are earning more than before and saving even more, we are not really creating wealth over time. This is the savings trap we need to break. Think over it.
The Security trap
We don't have adequate social security in India. That's an unpleasant and unfortunate fact. Even if available, often it is grossly inadequate. It is just about enough to cater to the 'poor segment' of the population but inadequate as far as the middle class is concerned. There is no debate that events like accidents, sickness, diseases, disability, death etc carry a huge burden on us and often give us unbearable financial shocks. I am not even counting things like theft, fire, etc for properties here.
There was an alarming report published in June 2018 by experts from Public Health Foundation of India. The report said that 55 million Indians were pushed into poverty in a single year because of having to fund their own healthcare and 38 million of them fell below the poverty line due to spending on medicines alone.
Most of us do not have the full required range of insurance of ourselves. Life, health and personal accident insurance are the three critical insurance policies we should have but most of don't. Even for those who have the same, most of the times there is underinsurance. A lot of insurance agents who sold traditional life insurance policies which promised nominal returns at the cost of insurance coverage, did grave injustice to investors. The investors neither got adequate insurance nor created wealth. Pure term insurance products was rarely sold till only recently when there was demand for same from investors.
The Spending trap:
In the past few years, we have undergone a cultural and behavioural change when it comes to our spending habits. As kids, we used to buy new clothes and shoes only on Diwali. We spend little on electronics, ate outside very rarely and went on holidays like on budget trips (by today's standards). We bought things only when we had money and we rarely borrowed as it was considered not good in our upbringing.
Cut to today. There is a popular line which says 'today we spend money which we don't have on things which we don't need to please people who we don't know'. We have replaced what we need with what we desire and what we can afford the most, by stretching our budgets. We buy the best gadgets we can even though the old ones are working fine. We buy cloths, watches, shoes, cars as a status symbol. We holiday in exotic locations to post pictures on Facebook and get happy on the likes. Today our celebrations for birthdays, anniversaries, marriages are grand and lavish. We are buying things on loans which are based on our current /projected income growth.
Unless we break this spending trap, we will not realise the full opportunity of saving and investing in growth assets. Every time we spend unnecessarily, we are sacrificing future wealth for our immediate gratification. This has to be controlled and if possible, stopped.
Conclusion:
It is not possible for 'all' of us to become very very rich in our lifetime. To be honest, most us avoid taking risks and/or do not have the necessary skills or talent or opportunities to do so. But we can all strive for a much better future for us and our families and we can become rich by our present standards. At the worse, we should avoid stagnating at our current levels of wealth (in real terms) while making sure that we never fall down from our present levels. Remember, it is not just important to become rich but also stay rich.
The clear message is that we need to get over the three traps mentioned in this article. How? We need to [1] save and invest in growth assets that give us real returns in long term [2] get adequate insurance to protect ourselves from any unfortunate events that can wipe out a life time of our savings and [3] control our arbitrary spendings and reduce debt. These simple things are very simple and easy to execute and possible for everyone of us.
As we start a new decade of 2020s, let us also pledge to make this decade a decade dedicated for our family's prosperity and financial well-being.
