
I have a friend who has a net-worth in the region of Rs 100 crore. Resides in a simple 2bhk in a Mumbai suburb and lives what we would call a ‘frugal’ life.
I would think (and say) he leads a simple and independent life and I have seen this lifestyle for the past 45 years. It has remained the same! His daughters’ marriages were done in a very simple style and I dare say he must not have spent much on those events too.
Why am I saying all this?
He spends far less than what he earns and he is about 68 years of age, does not own a car and rarely takes vacations. He gives far more to charity than he spends on himself.
Typically, people get carried away when they get rich. They first go and build a house which is far bigger than a house they need. Mostly, people seek ‘status’ and not happiness. They buy big houses and cars – what is called the ‘show-off’ assets. These assets do nothing to increase your being wealthy, but announce to the world that you have arrived!
Which means these assets are not for your happiness, but to show to society. I remember my experiences -the planning, the booking, the travel, the photos…I don’t remember my so-called ‘things’ I own. Check what you remember -things or experiences?
Why do we need big houses? Will we need it to make our armies, and servants stay there?
Do we feel more secure if we have a bigger car? Or a bigger house?
If we start looking at the price of ‘things’ in terms of ‘time’ we may act differently. Say a person about 38 years of age is considering buying a house and the house costs Rs 1.25 crore – out of which Rs 90 lakh is a loan. This means that the total cost of the house is Rs 2.25 crore – if this person is earning Rs 25 lakh a year, this house is worth 9 years effort! A SUV could be 2 years, a vacation 2 years etc. This sounds like if you buy this house, this decision alone pushes your retirement back by 9 years! Similarly, when you consider such ‘show-off’ expenses, ask yourself ‘do I want this or do I want financial freedom’.
I am not saying living frugally is better or spending is better, but clearly the decision of Frugality vs Financial Independence is each and every person’s individual call. It is not the business of the financial planner to decide what a person should choose.
How much money you have at the end of your life is a function of how much you earn and how well you manage your wants, and how well you manage your portfolio.
Of course, it depends on how well you control your emotions. It’s just about having the right behaviour – asset allocation, patience, control over greed and fear, long-term thinking, etc.