There is a time to save and a time to use that saving: Know what to do when

By Uma Shashikant

A friend, who retired 10 years ago, is an unhappy person these days. She has seen her interest income dwindle as rates have fallen. When she asked me what she should be doing, I told her she must draw from her principal. She was shocked. She flatly refused to do anything of that sort. Why?

For many savers, using their saving is a challenge. I do not know what might be that unknown emergency for which that money must be left untouched. If a global pandemic that has shut down most businesses and left folks imprisoned in their homes is not an emergency, what is?

The attitude of the fastidious savers is that they must somehow not enjoy the money they have set aside. To use it is sinful consumption. To guard it and keep it safely, to hoard it and protect it, are like acts of great self discipline. So they live in denial of their own simple needs. Saving is for savings sake.This can be harmful. To them, their children, spouses, and maybe society at large could benefit from from this hoard that is not used. The primary reason the money is not used is fear. They worry that they will outlive the money. That they will wake up one morning to find that it is all over.

The argument with my friend was as follows: If you have Rs 1 crore in savings and investments, and if you need just Rs lakh for your expense every year, you don’t have to live in fear about every Rs 6 lakh you draw from it. Consider a watermark that must make you panic and stop. What would that be?

She fidgeted with the idea and finally came up with an arbitrary number of Rs 60 lakh. Then I asked her to think of that number as the one to preserve and the balance of Rs 40 lakh to be available to use and replenish as she can. The interest income is not zero. She will need about a Rs 1 lakh. How much will the dent be if there is a 3-year period in which she draws a few lakhs?

The problem is that she imagines the present to extend into the future. What she sees today is what she imagines will be the case all through the future. So if I draw a lakh today, soon it will become a habit and there will be nothing for my children, she argues.

Ah, that is the catch. Why should the objective of the parent, an aged one at that, be to worry about the grown up children and deny herself some simple luxuries? Her children would be furious if they heard this argument. But she thinks that it is her duty to leave something behind. The children would be fine if she used it all up, as they are quite well settled.

The problem of not drawing from assets is so widely prevalent. In this crisis, there are people who worry about their salary cuts. The expenses of the household have shot up. Another friend was complaining about not spending on things she loves—travel, eating out, movies, clothes and spa. But spending a fortune on mere everyday stuff like grocery, ordering out, online coaching and electricity bills.

Her worry was that the reduced salary was barely covering these basic expenses as costs of these things have doubled. When I asked her if she would draw from her fixed deposits, she seemed shocked. How could I do that, she worried.

The problem is that accessing savings is seen like a wrong decision. One is only meant to keep adding to it. Or the household is doing well only if it is accumulating. This need not be the case. Accumulated wealth can be used in many ways, and it should be used when there is a need.

First, a loan can be taken against an asset. It seems counter-intuitive to take a loan when the income of the household has fallen. But banks will be willing to lend at low rates if the loan is secured by an asset. The borrower also has the discipline of repaying, since they don’t want to lose the asset.

Second, the asset can be liquidated in small portions and used in difficult times and replenished when times get better. This requires that the asset is liquid and divisible like a deposit or a mutual fund. As long as small portions are used, this won’t harm the household’s wealth.

Farming households tend to have such circulating assets that can be sold or pawned as incomes and needs go up and down. Gold, cows, goats, chicken are all emergency stores that will be used as needed.

Third, flexibilities offered in the financial product to draw as needed can be used. A systematic withdrawal plan in a mutual fund helps set up a drawdown amount that is taken out periodically. It provides an easy implementation of accumulating in good years and drawing in bad years.

Fourth, a strategy of drawing from an asset periodically to create a pool for emergencies makes it easier to liquidate and use that specific asset. There are savers who accumulate dividends in such a pool. Some like to reinvest the maturity proceeds of a bond or deposit while setting aside the accumulated interest for use. Some periodically book profits from their equity portfolio and add the money to their deposits, to be used as needed.

Without the orientation that there must be a plan to use the money that has been saved, many remain overly conservative and fail to use the money they have saved. Sometimes secretiveness is added to the recipe. If others come to know, they will spend it, is the thinking. There is money stashed away by the husband without letting anyone including the wife, know about it. Then they pass away without leaving enough information for the family to get it. Such money goes unclaimed and unused after their lifetime. The irony is that it is used to finance the government’s investor education fund that tells people how to save and invest.

My doctor friend’s wife waited all her life for her busy husband to take her on a world tour. He now has retired and is ready, but she is too old, frail and arthritic. Our man will go to his grave unable to ever make it up to his resentful and bitter wife of many years! There is a time to save, and a time to use that saving.

(The writer is Chairperson, Centre for Investment Education and Learning.)