How lifestyle choices can help accumulate wealth
Having lived in a few countries, I have had the chance to meet and interact with people from different backgrounds and cultures. It has also exposed me to different lifestyles people adopt. While I am no one to tell people what they should do in life, I thought I could at least share my perspective on how lifestyle changes can help people accumulate wealth and feel more secure. The post is mainly geared towards educated young people in EM, specially countries where governments are not providing them healthcare or good education, and those who don't have family wealth and need to save for their retirement.
The developed world has different parameters. People are generally wealthy enough to afford a decent lifestyle - rent a decent property, send their kids to good schools, afford healthcare, have a car, buy enough food and wine, eat out twice a week, and shop few times a month on discretionary items. They also have to save less because social security and pensions should help take care of their old age. There are talks about rising wealth gaps globally, erosion of the developed world's middle class and a pensions crisis across major global economies but that discussion is for another post.
The lifestyle choices of the West, and richer countries made it's way to the Emerging world by the way of movies and Companies looking to advertise to drive the same scam called consumerism. This would include having gigantic houses, more than one car, eating out, and shopping on credit cards . Lately, social media has exposed people to the lifestyle of the rich, almost bombarded them with it. The internet has removed geographic boundaries even more. Seeing a large potential consumer base, companies have invested in EM, and additionally, a lot of other work has also been outsourced to these countries. The result is that a strong middle class has emerged in countries such as India, China and those in Latin America, and South East Asia - and young professionals are living the life as seen on instagram - eat out everyday, take uber to work at 3x surge, get a taste of luxury, get big SUVs, etc.
While it is great to have a good lifestyle that makes you happy, what young people in Emerging markets can't forget is that their governments are not rich. 75% of Indian population lives on less than $2 a day. The government has not been able to provide healthcare, education or clean water and the infrastructure is extremely poor. Therefore, people in Emerging markets will need to save much more for their retirement. Not just save for themselves, but also invest, not take poor investment decisions. They will also have to save for the poor, as governments rely on taxes to ensure all people can be fed.
To explain the scenario that most young professionals face, I will use the example of an average 25 year old Indian, good education, working in an average job. The person, assuming lives in a metropolitan city, will earn ~INR 50,000 per month or ~USD 700 and will be spending 20 to 25% on rent, 10% on food, 10% on utilities and 5 to 10% on domestic help. That is half the pay gone to meet basic requirements. Assuming the person will work for 35 more years at the same pay, 0 inflation, and then will have 25 years of life left, this person needs to save at least 25,000 for those 25 years of retirement - nearly 25/(35x2) or 36% or salary just to meet basic requirements during old age. However, if one includes travel, and discretionary spend done to feel happy, the person is not going to survive retirement at all. That is a scary scenario for all! Inflation will eat into the savings as well. However, he/she will most likely see above inflation earnings growth, real earnings on savings (if any savings at all). If there are added expenses, then the burden of saving will be higher. Added expenses are kids, house, car, education, healthcare, marriage.. the list is long.
Now, what can one do? I want to share a few ideas I feel can help one a lot.
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Do the math! - If a person lives in a metro city, one can expect a lot of travel to work. Figure out what is better - public transport + cheap rent living far away from work, or saving on travel expense and paying a bit more on rent. Most people I see do not do the math and want to live in "cool" areas. There will always be a time to live in better parts of the city. Save, invest and you could even be looking to retire early.
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Move to a cheaper city! There is no point living in a big city if it makes you poorer. Let's look at what is happening in the developed world. Foreign money has jacked up house prices like crazy! The older generation has done the same by investing heavily in real estate and people are flocking to big cities for work. Higher house prices, force people to rent and higher rents push rents higher. Heard the story of Google employees living in caravans as housing is unafforable in California? Most companies these days have offices in cheaper tier 2 or tier 3 city. Do not swayed by the charm of big cities, they come at a cost. Focus on tier-2 cities that are affordable and where work in not compromised. The rent can straight away drop from 20% of your income to 10% or even lower, you can afford to live close to work, in a bigger house and save even more.
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Invest first and then spend - Most people first spend money and then save whatever is left. That will never work. Specially if you have no self control. If you have to get the latest phone and and the latest shoes, then please start investing first. Please take out 35% of your money and invest in mutual funds/equity markets and then see what you can afford. The goods will always stay, you can always buy a new phone after a few years. For an average person, it is impossible to tell the difference between a photo taken from a single lens phone versus the one with 3. And having a half eaten apple on the back of your phone doesn't make you rich.
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Please do not speculate in any financial markets - We have all heard stories of people becoming millionaires and billionaires from equity markets. I can tell you that there are far higher number of people who have burnt their hands speculating in financial markets. The kind of comments I hear on why people bought a stock is outright ridiculous. Even the best in the game get it wrong most of the time, but they educate themselves first, and understand their investment style and risk reward. If you have not done that, please DO NOT speculate in any market. Please do not invest in a stock on the basis of someone's advice, even if that person works for Goldman Sachs. Analysts get it wrong all the time and have no accountability. Educate yourself over 6 months, one year and start small, don't play with leverage. Understand what is your risk tolerance. To be honest, just don't speculate.
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Do not take loans for purchase of useless assets - Stop taking out loans for stupid assets such as cars/bikes. Use public transport. Buy used vehicles. Buying a new car is literally burning your money, just to get from point A to point B. In India, a car loan will cost you 10% per annum. Instead of earning may be 15% (average return for equity markets over 5 years, also the useful life of a car) ever year on the money, you paid that to a bank for an asset that after 5 years is worth 0! Add to that fuel, servicing, insurance, and extra costs. Please never put money in any asset that generates below inflation return, specially not one that has negative capital return.
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Stop consuming wastefully - Do not replace clothes made out of polyester, they don't go bad and look the same every year. They will look the same every year for the next 10 years. You do not need a pair of jeans in every colour. If something can be reused, reuse it. Stop wasting money on substandard jewellery and smartwatches. Eat out less often, drink at home, go to expensive places less frequently. Make travel bookings in advance.
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Become independent - The biggest lifestyle change people can do is acquiring basic survival skills such as cooking and cleaning the house. That alone can save people in EM about 20% of there monthly wage. Adopt everything from the West. Having a person clean their house and cook food everyday is unthinkable in the west. Everyone makes their own food, does their own grocery shopping and lives fairly modestly.
Those are some of my tips, I hope you find them useful. Anything else to add, any feedback is always welcome. Saving is the first step to acquiring wealth. It is a slow process. The first step is to spend and save right.
