The ultimate money question we need to ask
How do you strike a balance between today and tomorrow? This is the ultimate personal finance question that each of us need to answer. Each time I hear of an untimely death of somebody I know due to a heart attack, cancer or a stroke, I ask myself this question: life is fragile, why think so much about the future? But then there are stories of the old people who have outlived their retirement corpus or find current rates of inflation out of sync with their retirement corpuses built 15-20 years ago. Newspaper stories of aged people starving to death in their middle-class home because they ran out of money are not unusual. Life is fragile. Life is tenacious. How do you live each day knowing that it can end in a heartbeat and yet behave as if you will live forever?
This tightrope walk between the future and the present is the biggest personal finance lesson that I am still in the process of learning. I have found that the art of staying somewhat balanced between tomorrow and today goes through three stages. The first is when the viability of your today itself is in question, there is very little you can do for a tomorrow. You need to put on your today’s oxygen mask first before thinking about a tomorrow. The stressful 30s is the age when today is far more important financially than tomorrow. This is the decade in which the challenges are both personal and professional. Most people in this age band are married, are precariously balancing young kids, a home EMI, a car EMI and plenty of aspirational expenses. This is the stage in which planning for a retired life looks unreal because the body is strong and there are more years ahead than behind. This is the stage during which even a small contribution towards your future self will have a very big impact as the money will get time to compound. Other than your PF, if you can just do another 5% of your post-tax income towards your retirement in equity, you are fine.
Second, the settled 40s, when there is greater certainty about the overall direction of life. Today’s basic needs are mostly done, or are well on their way to being completed—a house, a car, a basic level of living. There is more money than before but the lifestyle demands can be strong. A still healthy body, a steady career, a growing family and a promising future can all contribute to thinking more about today than tomorrow. But this is the decade in which you can salt away more for the future than before. This is the decade over which a solid foundation is built for your future, older self. The surplus is more as incomes are higher, in addition, the release of money from the home EMI and the car EMI can easily be blown away in the next home and car upgrade or it can go to bump up the retirement pool. This threshold decade between the younger you and the older you, is financially crucial. If you are saving an extra 10% of your post-tax income over your PF in an equity-linked product, you should be doing fine.
Third, the cruising 50s, when most people are at the peak of their careers and retirement is no longer something that happens to others. This is the decade in which most of the goals you targeted, happen—children’s education, their marriage. This is also the decade in which you have the money to substantially add to the retirement pool. The home is fully bought, children are gone, salary is at the career peak and expenses mostly have settled down—an ageing body is no longer able to binge as much as before and possibly the lifestyle needs have settled down to what works for you rather than what your social group is doing. This is the decade in which tomorrow could take precedence over today. This is the decade in which you target your retirement most aggressively and the savings ratios depend on what your shortfall is. This is also the decade in which you look at pictures of yourself from 20 years ago and either thank your younger self for being financially mature or not.
The biggest mystery of our lives is the time and date of our death, but this philosophical question mark has a deep impact on our financial lives. So, we do both—insure our lives against living too short and then build our retirement pool against living too long, all the while remembering to make the balance between living today and tomorrow. What use is that fantastic retirement corpus if it means that your today is a hated treadmill? What use is the multi-crore net worth if it has come by way of shell companies and career-destroying conflicts of interest? At every life stage it helps to answer the question—how much is enough—both now and in the future.
Monika Halan writes on household finance, policy and regulation. She is consulting editor Mint. She can be reached at firstname.lastname@example.org.