Every time we approach the end of a financial year, there are some sleeping heads who wake up unsure about whether they have made those tax saving investments in time.
No one is happy paying taxes they could have saved. Yet, when it comes to taking action, it’s done at the last minute. It’s not just taxes but other money actions like investing and bill paying too which face the last minute whip.
Some say that as long as the job gets done, it’s not a problem. While it may seem like the job is getting done, a last minute action means that the efficiency of outcomes suffer.
Sample this: We start earning at the age of 25 or thereabouts, but wait till the age of 40 to start investing for retirement. In doing so, we have missed 15 years of compounded returns which could have gone towards the retirement kitty. In number terms this means you could have had an additional ₹4.8 crore in your retirement kitty by the time you are 60, had you given yourself a head start with a monthly investment of ₹10,000 in equity at the age of 25 years (assuming this investment stops at 40 years age and compounds for the next 20 years).
The benefit of starting your investment early is not a secret and neither is saving ₹10,000 a month a tough task and yet we get to the job only when the responsibility becomes too large to ignore or shirk.
Why is it so easy to postpone that constructive money action like investing?
Most money decisions other than spending don’t result in any immediate emotional impact. The investment you make, whether for tax saving or your retirement, has no effect on your mood the moment that you make it. The benefit of tax saving is seen only in a certain period and the benefit of the investment itself, years later.
It’s easier to spend on a new phone rather than investing that amount. The new phone has an inherent advantage; it can give you instant pleasure.
The human mind by default craves pleasure and avoids pain.
There is no apparent pleasure in making the tax saving investment in April as opposed to December, but there is instant pleasure in buying a new phone. You get the new phone, there is excitement and an endorphin rush. People around you desire to see it, talk about it, further endorphin rush – the opportunity cost of not making that investment is forgotten too soon.
On a larger canvas, the same happens with investments made towards your retirement kitty. At 25, we are too busy experiencing the pleasures of spending. The anxiety of failing financial well-being comes much later when expenses around dependents, health and lifestyle increase. By the time there is a realisation that your income will not go on increasing forever and you do not desire to work beyond a certain age, you have already lost 10-15 good years of accumulated savings and compounding returns.
How can you overcome this emotional bias?
The pain and pleasure principle that governs human beings suggests that timing also matters. The brain does not perceive distant pain as seriously as immediate pain and the same goes for pleasure. When it comes to starting your investment journey early – the pain of not doing it is distant, whereas the pleasure of using that money elsewhere is immediate.
Instant pleasure is a lot easier to perceive than distant pain.
Hence, investments take a backseat over immediate spending.
What you have to acknowledge early on is that the pot of money for most of us is limited, hence, how we use it matters. Unless you focus on growing the pot, you will not be able to reach a state of financial wellbeing, which is as much about your lifestyle today as it is about your future.
A tiny bit of awareness, a sprinkling of discipline and large doses of automation, can help you overcome the bias of shirking pain and embracing immediate pleasure.
Awareness is needed to understand that the benefits of starting your investment early rather than leaving it to the last minute far outweigh the pain of action today. To build this awareness it will help you to visualise and maybe even draw out that distant goal you are investing towards; perception will now be closer and feel more like reality. Visualise also that you will be getting older or eventually you will become redundant at your job.
Next step is to ascertain how much you can potentially save and invest in a month without disrupting your current lifestyle too much. There is always room to save, that’s where the sprinkling of discipline is needed.
Lastly, automate action so that there is no emotional intervention. Let the important investments happen on auto pilot, don’t give yourself the opportunity to disrupt process. The best way to do this is with regular investments in debt and equity funds through systematic investment plans which will automatically invest money from your account at a date chosen by you. You only have to take the first step of setting it up. the first step is best taken when you are at the peak of your visualisation and awareness.
What should you do?
It requires no effort to let instant pleasure take over your money decisions and actions. However, instant pleasure almost never lasts as long as you expect it too. When it fades and you realise that you need to do more with your money, it leads to last minute decision making which is never enough.
Why not use your resources in a way that you balance out the joy of now with the well-being of your future; think of it as your ability to stretch instant pleasure of your money decisions, many years into the future.
Visualise, plan and automate your long term investments, rather than leaving it for the last minute; the benefits go towards your future financial being which along with your present, cannot be ignored.
Lisa Pallavi Barbora is a financial coach and founder of moneypuzzle.in