Learn to spend wisely: Distinguish between wants and needs

When you get a gift voucher, you don’t spend too much time thinking about the best ways to use it. All you want is to quickly utilise the voucher. Unfortunately, most youngsters treat their paycheques the same way. Even before their salary reaches their bank accounts, plans to blow it away have already been finalised. The dangerous combination of promotional advertising, peer pressure and personal aspirations is compelling millennials to satisfy their wants and sacrifice their needs.

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Spending your hard earned money is not a vice. To some extent, it is also essential because it helps us maintain the quality of our lives. But there is a difference between spending for living a good life, and spending on things for instant gratification. While we need to spend on essentials like food, clothing and other things, we also need to think of how to improve the future quality of our lives.

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If we can draw a line between spending and spending wisely, we can make better choices. For example, you can spend time watching television or reading a good book. Watching television will bring you instant gratification, but investing in a good book may make you richer with knowledge and add to your skills. We also need to distinguish our wants from our needs. A car can be both a want and a need. If you buy a modestly priced car for going to work or travelling with your family, you are satisfying a need. But if you buy a costly SUV to show off, you are giving in to a want.

Mind you, a car is a depreciating asset and its value comes down the minute you drive out of the showroom. But some assets you buy can appreciate as well. They can add value to your life and enhance its quality. A book is one such asset. Then there are investments, such as stocks, mutual funds and even fixed deposits. Like the time and money well spent on a book, these assets can also enhance the quality of your life by adding to your wealth.

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Prudent investing should be a conscious choice for the young generation. It can transform their financial future and make them free from money problems. Good investments appreciate in value over time, gaining from the power of compounding over the years. Some have even called compounding the eighth wonder of the world.

Admittedly, investing before spending may not come automatically to a generation brought up on consumerism. But it is a discipline we ought to develop. An investment should be seen as a gift voucher which you cannot use right away but can be redeemed for a far higher value after a few years.

By D.P. Singh, Executive Director & CMO, SBI Mutual Fund
(Views expressed by the author are personal)