30 June 2018 13:24:59 IST

Living beyond one’s means

There’s a difference between earning and being wealthy. Understanding it is key to financial security

Earning and being wealthy are two completely different things. In many cases, it has no correlation at all! There are enough stories about people who earn lots of money, only to later end up in very poor financial situations. There are also enough examples of people who don’t earn all that much but are financially well off.

The key difference between these two scenarios is with regard to how people spend and invest. In this article, I will focus on the aspect of spending. It assumes significance in the light of certain important choices that are made with regard to jobs and careers.

Many times, management graduates seek opportunities in their home town. In a few instances, this is because of personal reasons, but in many cases, it is largely because they wish to pursue a certain kind of a lifestyle, and outside of home, they would face a financial crunch because of incurring functional expenses such as rent

In isolation, this is perfectly fine. The person is being astute by leveraging the existing infrastructure of their home, so that they can spend their money the way they want. However, the downside of such a decision is the danger of developing a pattern while changing jobs, that is driven by money alone. It would then become a challenge to break out of such a comfort zone and it would definitely cramp anyone’s career progression.

The other side of the story is where people take up jobs outside of their home town. Here too there are dangers of lifestyle-driven spending, albeit of a different kind. Peer pressure, along with any inherent lifestyle orientation, defines their spending pattern. In most cases, the propensity to spend beyond their means becomes quite common. Aided by the availability of credit cards, this habit can suck in a person into a vicious cycle of debt before he or she even realises it. Initially, this might not be apparent, as outstanding amounts can juggled between various cards. But as amounts keep increasing, it only adds on to the overall debt, along with the interest.

Such a pattern can still be manageable when a person is single. But if this spending habit continues, it can become an issue when the starts a family.

While the advice of ‘spend prudently’ might sound very old fashioned and boring, this is the only path to long-term financial security. If it is of any help, keep in mind the fact that some of the world’s richest people have a very frugal lifestyle. That should be a good benchmark to follow.

A simple rule of the thumb is to put aside at least 10-20 per cent of what you earn into savings and investments. After putting aside the amount required for functional expenses, then tailor your lifestyle to fit the balance amount.