Investing: Money saved is money earned

What is the most common reason why people do not start investing? Of course, it is the lack of money by the time the month ends. Living paycheck to paycheck simply means that there is no money left for investments. It is not easy for most of us to increase our income overnight or start a side gig. The only way out for common folks like us is to cut expenses where ever possible and use that money for investments. Looks difficult? Read on to see how simple it is.

There was an old joke which goes something like this:

Even though, the joke looks stupid, it has a deeper meaning to it. The advice really holds good for all the people. While walking can be subjective and extreme to a few people, we can definitely consider cycling or going by public transport buses instead of auto. Even if we leave the health benefit aside, we are sure to save money out of it.

Let us take an example to drive home the point:

Income of a man: 40,000 INR

Monthly expenses (all in INR):

Now, this man can easily argue that he does not earn enough to save or invest. Let us see how we can make this person earn some ‘extra’ money to pursue investments.

Let us attack his expenses:

• Household expenses of 20,000 are left unchanged
• If he is so serious about the investments, he can surely do away with cable and start using low cost internet plans. However, his family may still need cable and TV. Hence, instead of completely eliminating this, let us assume he switches to low cost plans. Cable can be selected only for those channels that his family watches and internet can be of medium (or low) speed with limited download option. New cost: 1,000 (500+500 or 250+750)
• Car EMI: let us swallow the bitter pill now instead of pushing that pill down our throats in retirement. If his family wants cable, it mostly means  they are at home. Effectively, we can assume that he is the one who drives his car to office. If he is serious about the future, he has to travel by company bus or public bus. He has to sell his car. Pay off the loan and keep the extra amount in liquid funds as emergency funds. Car EMI is completely eliminated.
• Utility bills like telephone and electricity currently costs him 3,000. Although, small changes can be made, let us keep that as it is for now. Cost: no change – 3,000.
• Travelling costs him 5,000. This must be of petrol and toll charges. Na rahegi bass, na bajegi basuri. Since the car is gone, this petrol and toll cost will be zero. Now, he would be using public transport of company bus. Let us give him the luxury of travelling by ac bus or ac train (a distant dream for Mumbaikars). New cost: 4,000
• Entertainment costs him 1,000. Let us keep it as it is.
• We cannot change maintenance cost too. Unchanged at 4,000

New figure: 20,000 + 1,000 + 3,000 + 4,000 + 1,000 + 4,000 = 33,000

Whoa! … We now have extra 7,000 to invest. He can buy health insurance, life insurance, mutual funds or debt funds.

If a more amount is needed for investment, more bitter pills have to be swallowed. It can be like limited or no entertainment for year or so, second class or normal bus travel instead of air conditioning.

Here, we have demonstrated how even if the person’s income is same, we can ‘generate’ additional amount of investment. Technically, he is not earning or generating additional income. However, logically, he has started earning 7,000 more per month.

This proves the age old wisdom: Money saved is money earned.

Readers – what are your views on this? Have you tried this formula?