Financial experts often speak of how your daily cafe lattes are taking you into a black hole of no savings; and how cutting back on these ‘luxury’ habits can help you achieve your goals earlier.
They call it the Latte Effect: If your need is caffeine, it is cheaper to stir up a cup of joe at home or at work; but your want is the luxurious experience of a cup brewed by a smiling barista in a cosy cafe.
Distinguishing between your wants and your needs is touted by personal finance experts as the holy grail to a better financial life. Saving on ‘unnecessary’ expenses is something even Kevin O’Leary (of Shark Tank) promotes when he says he never has take-out coffee and that he would rather invest the money and let it grow when he sleeps.
So, let’s say you do fight your desires, cut back on that cup of coffee, or take-out food, and save an additional Rs 3,000 per month, what happens next?
The money could add up to Rs 1 crore over a 30 year period if you invest it wisely. That’s a lot of money.
But personal finance isn’t just about telling you what you must or must not do in order to meet a particular goal, but often it is about getting back to the very basics and trying to understand what defines you and leads you to make certain decisions.
While Rs 1 crore is certainly a very attractive number, the methods of getting there, and the time you decide to take could be very different. How you spend your money is a net result of all your experiences. If you grew up in an environment where budgeting and money was the topic of every dinner table conversation, you could grow up hating anything to do with budgeting and spend all your money generously.
On the other hand, if you grew up leading an opulent lifestyle and then had to face a financial crisis, your thinking would be markedly different.
We often hear people saying, “I know I should be saving”, but has that statement been made because of the guilt of splurging on things that others, including family and spouses think is unnecessary?
If you are worrying about the little things and analysing every small purchase, it means there’s something that you’re doing wrong. It’s important to look at the larger picture which is earning more and planning better. And for your investments, saving first and spending later is as easy as the rules come and with the ability to automate our investments to avoiding poor choices, you’re almost there.
You need to figure out what works for you. I tried to use one of the mobile apps that would track my expenses, categorise them and at the end of the month, let me know where I’m spending too much money. I used it for a couple of months, understood my overall spending pattern and then couldn’t be bothered by it because it didn’t motivate me to do better. Most of us make the decision to work out at the gym because of the guilt of being lazy and we hope that having a plan in place will make us more disciplined in our behaviour, the same with a diet; which is probably why we have a lot of companies now focusing on meal plans and not diets.
But if you’re not setting yourself small yet achievable milestones without forcing yourself to let go of certain things, it’s unlikely that it’ll be fruitful. Probably why buying an annual gym membership is never a good idea. It’s about being nudged into a plan you are happy to follow and not something that you’re forced into.
In the end, the more things we worry about, the less we do anything at all. Live a little, go have that latte.
Nithin Sasikumar is the co-founder of Investography, a financial wellness company based in Bengaluru. He can be reached at firstname.lastname@example.org or on Twitter @NithinSasikumar