America faces supply chain disruption and shortages.” “From zippers to glass, shortages of basic goods hobble the US economy.” “America Is Running Out of Everything.”
Over the last few weeks, you could have read any number of news stories like these. If you read these news stories, you find that shoppers are wandering from store to store, looking for basic household supplies and goods. On e-Commerce sites, many goods that used to be available with one-day shipping now have waiting periods of a week or more. For those of us of a certain age, it all sounds quite familiar—the way things used to be in India in the 1970s.
Of course, there are shortages all over the world, most notably of semiconductors but nothing like the 360° ones being suffered by what was supposed to be the most ruthlessly efficient economy in the world. So what happened, where is the source of the problem? The answer is right there – efficiency. The root cause of the problem is efficiency. Do you find that surprising? Not only is efficiency a problem, it might also be a problem in your personal financial affairs. Let me explain.
What is efficiency? Generally, it means getting the most output with the least input. That sounds like a good thing. However, covid has exposed the negative side of efficiency. That’s because being efficient also means having no spare capacity. During the past 18 months, we have learnt (or at least, should have learned) the value of inefficiency. The inefficient are coming out of this pandemic much better than the highly efficient. We are so used to seeing inefficiency as a negative characteristic that we sometimes don’t stop and think about what it means for a business or indeed any system. I remember back in February 2020, when the virus was just limited to China, a friend who is familiar with the workings of private healthcare providers told me that there’s likely to be very little excess ICU capacity in private hospitals when the virus would start spreading in India.
Why’s that so? Having too many ICU beds lying vacant is inefficient. All that investment in beds, rooms, equipment and people is not earning any revenue. As a business, this is undoubtedly true. Having a vacant bed is healthcare’s equivalent of having capacity in a factory and not producing anything. If you are an investor in a company that runs hospitals, it would be in your financial interest to have as little spare, unused ICU capacity as possible. How did that work out once the pandemic took hold? That’s just an extreme example though. Many businesses are run in a way that even a small hiccup in the revenue or supply chains is hard to absorb. Costs, margins, debt—everything is fine-tuned precisely but can’t take any shock.
“There are many people whose entire incomes are spoken for in expenses and EMIs. They have no reserve capacity.”
Unfortunately, many individuals are in an equivalent position. There are many people whose entire incomes are spoken for in expenses and EMIs. They have no reserve capacity. The slightest disruption of income, or an unexpected large expense, as has happened to many during the pandemic, has blown apart their personal financial situations. I’m not blaming anyone here on an individual basis—many people have no leeway to do anything better.
However, many savers also carry this efficiency mantra to their projections about their investments and their future financial needs. I’ve seen people go to online calculators which do investment projections, put in exactly what they need and decide to invest just that. A saver enters, say, Rs 1 crore in 10 years and the calculator tells them that to save Rs 44,500 a month. Typically, such calculators are highly optimistic about the returns that can be generated. Your needs could change, Something drastic could happen. The Rs 44,500 is an ‘efficient’ estimate, in the sense that I talk about above. It’s a dangerous kind of efficiency.
Move over how to invest your money or save it, let us tell you how and when to spend it
5 tips to help you spend your money
Why do people struggle with something as mundane and natural as spending? Isn’t saving the more difficult habit to cultivate? The thing is, most of us are compulsive savers, constantly occupied with thoughts of the unknown tomorrow and stashing away money for a future contingency. We thus end up denying ourselves the pleasures of today, those we have the right and even means to enjoy.
In personal finance, we always emphasise life stage as a significant influencer of our money habits. As young earners, our income as well as our time and energy fall short of meeting the long list of needs, desires and things to do. And then as we age, we are left staring at our stash, wondering how to spend. We are not quite used to making that bold decision. Here is a list of 5 tips to help you.
Be willing to invest in interests
Identify what is vital to you and ask if you have allocated to it the money it deserves. Many instantly think of travel as one of their interests, it is a rather common retirement goal. To some, meeting friends and relatives as frequently as possible may be of grave importance. These days it is hard to miss the aged uncles and aunties who take the trouble to attend every wedding or ceremony in the family. If travel is really your interest, spend on the tickets, reservations, accommodations and such, to make sure the most of the experience and find maximum comfort in it. You don’t have to cut corners on activities that you are truly interested in.
Fund and plan for your passions
Honing your hobby demands that you devote the time, energy and resources essential to pursue it. If you are passionate about music and want to master the art formally, enroll in classes, approach it with the seriousness of a student. If photography brings you pleasure, invest in a good camera and lenses and do what it takes to pursue it seriously. If you think that this passion or a novel activity is also what will keep your retirement days happy and occupied, it makes sense to include associated expenses in estimating your corpus and making a reasonable budget to spend on it, so that you can enjoy it.
Time to treat yourself
Your entire life shouldn’t be all about saving. If there are expenses you have postponed in an endless wait for the right time and now have the money to spend, revisit these plans and take them to fruition. Buying books that you love reading, indulging in eating out to experiment with various cuisines, attending exhibitions, shows and concerts that interest you, or buying yourself items of clothing and jewellery that you denied yourself in your saving days, can come back and be financed if you have the money. You’re spending on not just yourself but on new experiences and memories.
If it makes life easier, it’s probably worth it
If there are expenses that will enhance your comfort and simplify matters for you, consider spending on those, such as a comfortable reading chair, a back-supporting couch, better quality furniture or furnishings, home improvement and such little things of everyday use which you ultimately spend most of your life using. If you have accounted for other spends and have the means, engage a cab to travel rather than taking public transport to work; fly instead of taking a train. These sound like trivial tweaks but many continue to make endless and unnecessary sacrifices to their own comfort, stemming from the former mindset of frugality which is not required any more.
Just because a spreadsheet turns out precise numbers does not mean anything. The future is uncertain, and always will be. If the pandemic teaches savers that much, some goodwill have come out of it.
(The writer is CEO, Value Research)