Basic problem is not earning, but expenses

Decision making has become complex, and price ranges are, well, Himalayan. It’s not very difficult to let yourself be driven by desire during an unthinking moment, and end up with a white elephant. Many of us do, and then we find that our salary-be it any size-is not enough. Then we look forward anxiously to our next increment, and think of them as enhanced leverage to bargain and get a new, better paying job. And eventually, even that turns out to be not enough.

So if more money is not the answer, what exactly is the problem and the solution? Think of “not enough money” as just a symptom. The real problem is elsewhere: expenses ballooning much faster than income. We don’t seem to put enough thought into rolling back expenses, obsessed as we are with increasing our income. Perhaps many of us fear that cutting back on expenses will make us look un-cool.

A typical Generation ‘Y’ kind of a guy with all cool attitude and rocking lifestyle. He earned very well and spent very well, too. His Rs 40,000 take home exceeded his needs by a grand sum of Rs 4,000. Only last year he was saving Rs 5,000 a month for his higher studies, out of a salary of Rs 30,000. One year later he is making ten grand more, and saving a thousand less. His savings look set to halve to Rs2,000 a month. He is alarmed. He needs to send Rs 5,000 home. So what’s he doing about it? He is looking for another job, one that pays better.

Now let us see if that would help. Let’s say he gets another job at Rs45,000 a month. That would temporarily ease his situation, leaving him a surplus of about Rs7,000. But going by his track record, this will taper precariously within a year. His basic problem is not earning, but expenses.

In the current situation, where he saves just Rs2,000 against expenses of Rs38,000, savings as a percentage of expenses are just 5.2%. Suppose he simply decreased expenses by Rs5000, instead of looking for a new job. His surplus then would be Rs7000. His savings as a percentage of his reduced expenses would now be 21.2% a major improvement.

Now let us say he doesn’t want to touch expenses. He jumps to another job that gives him a Rs5,000 raise. So in this scenario, too, his savings rise to Rs7,000 a month. But in relation to expenses, he is saving only 18.4%. And if he wanted to maintain his savings-to-expenses ratio, his salary would need to rise by Rs8,060 instead of by Rs7,000.

When one takes the proactive step of reducing expenses that are threatening to spiral out of control, the basic problem is addressed, and hence the future situation will improve. But when one takes the shortcut of a job switch and does not address the core problem, it’s a temporary measure at best. The problem will fester, and show up again, probably in a more serious form that may call for emergency measures.

If your expenses are running amok, muster your courage, look the problem squarely in the eye and tame it. Otherwise the beast will become your master, and you will become its slave.

Indulgence is fine within bounds and living a good life costs more than ever before. An ever-increasing array of products and services, with widely ranging prices, competes for our attention today. Gone are the days when one would go to a shop and order a TV (14” to 29” only), costing up to Rs 30,000. Today you first need to decide what kind of TV you want: a regular CRT, LCD or plasma. Then you need to decide whether it should be high definition or of normal resolution, whether you want one that plays different signals like PAL, whether it should play different file formats, and on and on. And prices range from Rs 6,000 to Rs 3.5lakh.

The adage “A penny saved is a penny earned” was coined by a portly eighteenth-century American named Benjamin Franklin. How much more old fashioned can one get. If Franklin’s advice was the mellow port wine of our parents’ generation, today’s attitude is a more like a heady cocktail of individualism and indulgence.