Mismatch between savings and dreams? 4 reality check that you need

People tend to have high aspirations, and often they want to fulfil them well ahead of their actual due dates. Sometimes, they find that many of their life goals are due at the same time, and hence, the goal amount becomes large. Therefore, it becomes extremely difficult for them to meet various goals.

When we, as financial advisors, discuss this with clients, they generally resist any changes to their goals, be it quantum or timing. They also do not like to review their expenses and explore if they can reduce these.

The one thing they are willing to consider is working towards increasing their income so that their goals can be met without any problems. But is it feasible to generate the desired income without adequate investment?

1. Wish and reality - Wishing the income to increase to a level where regular expenses and life goals can be accommodated is something most people want to believe is possible. But can income be increased at anyone’s will? For most people, this will be difficult.

If increasing income were so easily achievable, one would have already done it. Given that the potential for income increases carries certain risks, which is why it has not been previously considered, would it be wise to consider it now?

In most cases, income increase happens over time, but the expenses, goals, and lifestyles increase more than nullify this increase. Most people struggle throughout life with this income-expense mismatch, even though they are doing well by most metrics.

2. When this is possible - Sudden income increases are possible if someone leaves the current job and seeks out another one (mostly with a competitor) at a higher remuneration. In the current position, they might have spent years proving themselves, establishing credentials and great relationships as well as garnering a lot of goodwill.

When they leave for another position, they will need to start all over again and establish themselves, which has its own difficulties. In some cases, the transition is not successful, and they seek another assignment or try to come back to the original position. Both of these are not the most desirable options.

For those in business, increasing the income is possible only if there is potential to draw more—either from the regular cash flows or from the reserves, if they have any.

3. The passive income charade - When things get desperate, people start looking for twigs to clutch on to.

Many say they want to set up passive income. For most people, this passive income would mean investing their current wealth to earn income. But this will hinder the growth of one’s wealth if one utilises it to generate income and consume it. Wealth is created to meet future life goals. If a big portion of that wealth that would be needed in the future is going to be used now to augment the current income for consumption purposes, one is jeopardising the future. Drawing income for consumption from the wealth one is trying to create is like dipping into future income and security now!

There are passive income sources, such as royalties on books or creative content. Another option is to pursue a side gig, which can yield an income. But most side gigs take up a lot of time and effort and offer so little money as to be practically useless. Also, they take time away from the main pursuit, which is not desirable.

Passive income is a fig leaf to cover the fact that one is spending beyond their means. And as mentioned above, a passive income set-up out of wealth meant for the future is negative.

4. The illusion of leveraged income - This is another buzzword going around. In this you set up something like a business with a team and robust process or an education platform with courses on it, etc., which can offer income without your active involvement. This is like having a fruit orchard with fruit-yielding trees that require minimum maintenance. At least that is how it is positioned.

There are dozens of YouTubers who are encouraging people to leave their middle-class mentality and cramped existence and live life kingsize with help from passive income gushing out of businesses of various hues, which, once set up as per their strategy, will keep laying golden eggs for a lifetime!

Many believe such flights of fancy and leave their jobs and their middle-class existence searching for their Shambala in such fantastical ventures. Most people get wisdom after they have burned through a decent portion of their savings. And then, their existence starts two levels lower than where they were!

There is no escaping the basic personal finance 101. You can spend only up to what you earn. Any hocus-pocus to sugar-coat and make something else as an option seldom works. There is no substitute to spending within the income, savings for the future and investing wisely. Most people indulge in such a fool’s errand all the while thinking they have cracked the code!

Suresh Sadagopan is the MD & Principal Officer of Ladder7 Wealth Planners. He is also the author of the book “If God Was Your Financial Planner”.