Should I Make More Money or Spend Less?

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If you had to choose between making more money and spending less, what would you choose? “Wait a minute, why should I choose?”, you ask? Good question! Let us find out if you have to make that choice (or do both) ! Now, I hate thumb rules because most of the popular ones are flawed (eg. rule of 72), but here is a thumb rule that is pretty effective but most people either ignorer or cannot follow.

If you wish to plan for financial independence or (normal) retirement then,  invest for retirement as much as you spend for essentials. If your monthly expenses towards essential day-to-day expenses are about 40K, then invest at least that much for retirement (including your mandatory EPF/NPS contributions).

So now let us first find out if you need to make a choice between earning more money and spending less. For those interested in earning more money anyways here is a compilation of ideas from members of Asans Ideas for Wealth: How to Make More Money In India: Forty real examples

Please note that the following illustration is made with less than 40-year-olds in mind. Older money managers may find it difficult to reduce expenses and/or earn more income. Of course, it is certainly possible.

Let us take the case of Anita. She just turned 29 and is taking home Rs. 1L a month (this includes EPF contribution but is after tax). Let us call this take-home-pay for this example.  Let us assume her salary increases at 8% a year (including increments, promotions etc).

She spends about 40% of the salary each month towards essential expenses. So this means her expenses increase at 8% a year (because her salary increases at that rate). Essential expenses are those that will persist until she is alive.

Projecting future essential expenses based on current essential expenses is severely flawed as we will need more money for at least medicines as we age, but let us fly with it and see what we get.

She needs 20% of her take-home-pay for her wants (leisure, luxury, etc.) each month. This means: 40% goes to essential expenses, 20% goes for wants (non-essentials that are assumed to be absent after retirement). So she can invest the remaining 40% each month for her retirement. Let us assume she does not have any other financial goal to worry about.

Let us assume she will retire at age 55 (even that is too late seeing how healthy we are today!) and live up to age 85. She will need about 13 Crores at 55 to generate an inflation-protected income with that lump sum.

Does this seem too much?! I guess what you really mean is, “can she accumulate that much?”. Yes, she can. If she manages to invest like a robot 40% of her take-home-salary (this includes EPF contribution) for the next 26 years.

There is a catch though (there always is!). Her portfolio will have to generate a post-tax return of about 11% after 26 years to achieve this. Is this possible? yes. Is this probable? yes. Is this practical? I am not sure. An 11% after-tax return would mean a portfolio of at least 60% in stocks – not just now, but for all those 26 years.

So if you have noticed, Anita invests for retirement as much as her essential spends and even that has its weaknesses. Wait a minute. What about her accommodation? If she has her own home, fine. But what if she is renting? She will want a house of her own before retirement and that will not count rent as an expense that will persist in retirement.

If she is renting, then the above calculation is still correct if we assume the take-home-pay is after rent! But we have excluded rent after retirement. This means sometime within the next 26 years, Anita will have to buy a house. Meaning she will have to take a home loan. Where will the EMI come from? With luck a reasonable EMI = 40% of take-home-pay (as defined here).

Then what happens to her investments? Even if she gets rid of the 20% non-essential spending, her investment will by half. Meaning she will have a house she can call her own but not have enough corpus to retire “well”.

This is perhaps only one reason why many people need to stop and think: Should I be making more money or spending less? Well, it should be Should I be making more money AND spending less?

If we put our minds to it, we can spend a little less, but not enough to hit the necessary investment mark. So the grim reality for most money managers is that they need to earn more.

So the point of this post is, please do this calculation with the freefincal robo advisory software template and check if you can invest enough for retirement with your current earning and spending levels. Try to decrease spending if possible and invest more.

As regards earning more, the standard ways are getting a better paying job perhaps with higher qualifications. If you have hit saturation in this aspect then here are two questions:

1 Can you spare at least one hour a day (during weekdays) and more during weekends?

2 Do you have a skill or an interest that can be used for earning extra income?

If you want inspiration, check these out: How to Make More Money In India: Forty real examples

Please note that my intention is not to scare you into paralysis and an “all is lost” mode. My intention is to scare you into action. If you put your minds to it, you can still earn more and invest enough for retirement.

I will write more about making extra money preferably with some real-life examples.

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About the Author M Pattabiraman author of freefincal.comM. Pattabiraman(PhD) is the author and owner of  He is an associate professor at the Indian Institute of Technology, Madras since Aug 2006. Pattu” as he is popularly known, has co-authored two print-books, You can be rich too with goal based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management.  He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice. Pattu publishes unbiased, promotion-free research, analysis and holistic money management advice. Freefincal serves more than one million readers a year (2.5 million page views) with numbers based analysis on topical issues and has more than a 100 free calculators on different aspects of insurance and investment analysis. He conducts free money management sessions for corporates  and associations(see details below). Previous engagements include World Bank, RBI, BHEL, Asian Paints, TamilNadu Investors Association etc. Contact information: freefincal {at} Gmail {dot} com (sponsored posts or paid collaborations will not be entertained)
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  1. Sir,
    With due respect,

    All retirement calculator show too much amount to be saved for a normal retirement, whereas, in actual, morning mistof people including me investing about 1 /10th of that or 1/20th.

    I lost piece of mind whenever I see that..
    Pl suggest something.
    All readers will be grateful fif that.

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