The Hindu Business Line : Disciplined savings, prosperous life

It has been over 10 years since my friend, now a middle-level manager at a software company, met his friend, a highly successful top-level executive at a financial services firm. The difference in their economic status is striking. My friend is highly successful with a net worth that many will envy. His friend just makes his ends meet. The difference is not due to income levels — my friend earns far less than his friend. Neither is it a function of education, as my friend’s friend holds a PhD in some exotic discipline from the US. It appears that simple economic concepts can explain the difference in their status. What is it?

My friend is a disciplined saver and a cautious investor. He simply takes 15 per cent of his monthly income and invests in systematic investment plan of choice mutual funds. Over the last 10 years, his investment has returned enough for him to buy another house, own all the modern-day electronic gadgets and enjoy a vacation abroad once every two years!

Beat inflation

His friend, however, faltered in his planning. He earns well but spends more. The result? He hardly takes any vacation and suffers from health problems. Importantly, he has not yet built his retirement account.

The message is clear. You have to be a disciplined saver to be rich. Intelligence or high levels of income are not as important. A study by an economics professor in the US confirms this argument.

You may be wondering if my friend became rich due to the nature of his investments. Not really. You can become rich investing in an index fund. It is necessary to invest in an instrument that consistently beats inflation.

The important factor is to stash away a proportion, say 10 per cent, of your income every month into an investment. And you should do it before you spend money for your monthly expenses. That is the economics that played in my friend’s favour. You could do it too.

(The author is a Chennai-based financial analyst.)

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