“Annual income twenty pounds, annual expenditure nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pound ought and six, result misery.”
A lot of money rationalists and advisors would still swear by that line, written by Charles Dickens in his semi-autobiographical novel David Copperfield. An axiom that’s common across cultures; our Indian version being “jitni chaadar ho utne hi pair phailao” (spend less than you earn).
On the other hand, many may argue that the Dickensian world and some of its principles are too far removed from today’s times when borrowing has become a part of the Indian ethos.
The reality, perhaps, lies somewhere in between, expressed so succinctly by Zadie Smith in her latest article in the New Yorker, “Oh, hi, Charles. Hello and goodbye and hello again.”
However dated it may sound, what Dickens said more than one and a half centuries ago remains the foundation of any financial planning exercise even now but with a contemporary twist. So, now an advisor may not stop you from borrowing (which literally implies overshooting your income) but may tell you to borrow only as much as you can repay comfortably.
In theory, that may be the right advice, but what about in practice? A home loan EMI that may seem affordable right now may quickly become a burden for someone who might lose a job a few months later. There’s no way to predict such situations. The spate of layoffs during the Covid period and even through the last year in the IT and tech industries are cases in point.
In practice, the advice may differ for people in different circumstances. For instance, an advisor may not recommend taking a large loan to a person who is completely dependent on salary and works in an industry with job uncertainty. The advisor may not stop another person with the same salary from taking the same loan if the latter has, say, savings in some form or the income of a family member to fall back upon, at least for a period within which there’s hope to find another income source. A third person, who may have unused assets, may be advised to liquidate those to make a large down payment or to buy the house upfront.
Apart from one’s specific financial situation, there are other factors that make up a financial decision—the attitude towards risk, the life stage you are at, and the societal certainty you may have, among others. So, the advice for a younger person at the start of the career may differ from that given to someone closer to retirement who may have limited job options but more savings.
Quite clearly, there’s no single piece of advice that’s right for everyone. Finding the right advice, however, is also closely linked to finding the right advisor. In the above example, an advisor who may not clearly understand the client’s circumstances or the attitude towards risk and other factors may end up giving advice that is wrong for that individual.
It is also true that advice is a continuous process as life and circumstances keep changing. An advisor who understands you and can handhold you through those ups and downs while helping you achieve your life goals most efficiently will be the right fit. So, choose carefully.