Think Investor.  Traditional practices for financial well-being?

Research in recent times suggests that we can improve our physical well-being if we adopt traditional practices. Having early dinner, for instance, has been proven to be good for our physical health. Can traditional practices be extended to personal finance? Our parents and grandparents typically spent a sizeable proportion of their income to meet their living expenses. The remaining income was savings. Can this practice bode well for us?

Save first or last?

Modern society has lot of temptations. So, spending comes naturally to us. Saving is a forced habit. In this world, can the traditional practice of spend first, save-the-rest work? From a behavioural perspective, spending first satisfies our present bias. We prefer happiness today to happiness in the future. Stated differently, we prefer to spend today rather than save for the future.

Then, there is the argument about uncertainty. Even if you were to save every month, you still cannot be certain of achieving your life goal. This is because your equity investments can decline in value as your approach the time horizon for your life goal. So, the pain of sacrificing your present happiness for a better future may not even materialise.

Finally, there is the philosophical argument. We do not know how long we will live. So, the question that some ask is whether it is reasonable to sacrifice the present for a future that may not even exist.

All the above arguments are logical if you look from a biological perspective. Our cave-dwelling ancestors lived each day in a fight or flight response. According to neuroscientists, our brain is still trying to move away from this response and adapt to the modern world. Therefore, while traditional practices work well for our physical well-being, such practices may not be optimal to face the complexities of the present-day financial world.

It is optimal to save first and spend the rest of your monthly income. True, your investment outcome is uncertain. But you are saving for your family’s well-being, not just yours. So, it is optimal to buy health-care plans, life insurance policies and create wealth to protect and improve your family’s future.

(The author offers training programmes for individuals to manage their personal investments)

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