Topic 4: Set Your Goal, Start The SIP
The maturity of your monthly SIP should be aligned to the time horizon for your life goal
We typically spend most of our income, and then regret our spending decisions, especially when we need money to achieve our life goals. In this article, we discuss why you should set-up systematic investment plans (SIPs) to strike a balance between your spending & saving decisions. We also show you how to create SIPs to help you achieve your life goals.
Why Set-Up SIPs?
You and I suffer from what behavioral psychologists call “present bias”. This refers to our marked preference to enjoy life today at the expense of suffering the consequences in the future. Why is that so?
An important reason is delayed feedback. If you eat tasty but unhealthy food today, you enjoy the experience momentarily. But what if you eat healthy but not so tasty food instead? You do not reap the benefits till you. Likewise, spending today brings you happiness now. Saving for the future only gives you happiness in the future. Now, current happiness is much better than future happiness. So, spending today feels much better than saving for the future.
It is in this context that SIPs come in handy. One way to overcome the present bias is to set up a mechanical savings process, whereby the bank or the mutual fund transfers a portion of your current income every month to your preferred investment products. That is not all. SIP also helps overcome inertia. How? Given the mechanical process, you do not have to take effort to save each month. This process also significantly reduces regret that comes when you actively take decisions. So, you reduce the confusion in your brain that you experience each time you have to decide between spending & savings.
An important secondary effect of setting up a SIP is that savings is not a residual process, but the first step you take every month. Allow us to explain. If you do not set up a SIP, you will, perhaps, spend your current income first & then save what remains. This makes it difficult for you to achieve your life goal. But if you set up a SIP, the mutual fund or the bank will take out a pre-determined amount of savings from your account. This process helps you moderate your bias towards spending. Remember, your expenditure otherwise typically rises to meet your income.
Source: Business Line
We typically spend most of our income, and then regret our spending decisions, especially when we need money to achieve our life goals. In this article, we discuss why you should set-up systematic investment plans (SIPs) to strike a balance between your spending & saving decisions. We also show you how to create SIPs to help you achieve your life goals.
Why Set-Up SIPs?
You and I suffer from what behavioral psychologists call “present bias”. This refers to our marked preference to enjoy life today at the expense of suffering the consequences in the future. Why is that so?
An important reason is delayed feedback. If you eat tasty but unhealthy food today, you enjoy the experience momentarily. But what if you eat healthy but not so tasty food instead? You do not reap the benefits till you. Likewise, spending today brings you happiness now. Saving for the future only gives you happiness in the future. Now, current happiness is much better than future happiness. So, spending today feels much better than saving for the future.
It is in this context that SIPs come in handy. One way to overcome the present bias is to set up a mechanical savings process, whereby the bank or the mutual fund transfers a portion of your current income every month to your preferred investment products. That is not all. SIP also helps overcome inertia. How? Given the mechanical process, you do not have to take effort to save each month. This process also significantly reduces regret that comes when you actively take decisions. So, you reduce the confusion in your brain that you experience each time you have to decide between spending & savings.
An important secondary effect of setting up a SIP is that savings is not a residual process, but the first step you take every month. Allow us to explain. If you do not set up a SIP, you will, perhaps, spend your current income first & then save what remains. This makes it difficult for you to achieve your life goal. But if you set up a SIP, the mutual fund or the bank will take out a pre-determined amount of savings from your account. This process helps you moderate your bias towards spending. Remember, your expenditure otherwise typically rises to meet your income.
Source: Business Line