The public discussion about savings and investment in the media or social media is focused on the wrong issue. The most important point always seems to be where to invest. Which is the hot stock right now? Which is the best mutual fund? And, heaven forbid, which is the hottest crypto? To a young person who has just started earning and is casually observing all this, the entire exercise about investing appears to be about choosing the best investment. This is completely misleading.

The real problem is that most people are not investing at all, or investing too little. They start too late in life, sometimes don’t start at all, and when they do, they invest too little. Teaching the value of saving to young people is supposed to be a big part of financial literacy. However, some years ago, I came across an interaction that gave me a fresh perspective on the psychology of saving among those who have just started earning. On a television show, during a personal finance Q&A, a young man asked a question. He had just started earning and he wanted advice on what to do with his money. His greatest wish in the world was to buy a motorbike worth Rs.1.5 lakh. He had been dreaming about it for many years as something he would do when he started earning. It’s not an uncommon dream.

He wanted to know the fastest way to save enough money to buy a bike. In response, he received simple and sensible advice, complete with detailed calculations about how much he should save, what the returns would be, and when he would be able to buy the motorbike. As a conservative investment adviser, I should have concurred with this approach. Postponement of wish fulfillment is supposed to be a cornerstone of good financial behaviour. However, I found myself thinking that if he started saving now, he would probably be 30 years old by the time he would be able to buy it and that he would be just too old to enjoy riding that bike the way a young person would. In fact, he probably would not even want it then. So, perhaps, he should break the rules of good financial behaviour, and buy that bike right now with borrowed money, on an EMI.

Does that mean that he shouldn’t save at all? After all, it makes little sense to save while there are loans to be paid off. Even so, my point is that such a person should also save a little bit, even if it’s just Rs.1,000 a month. Even if it’s saving the money in a simple instrument like a recurring deposit in his bank.

The reason is that, at its heart, saving is not really about the arithmetic of returns and interest rates, and so on. It’s actually a way of thinking, a habit. A person who saves even a trivial amount of Rs.1,000 a month is a fundamentally different kind of person than the one who spends everything.

What I’m saying may not pass the test of correct financial advice, but it’s probably better to spend on what you want, as long as you know that it’s an indulgence, and at the same time, start getting into the habit of saving. Once you observe the magic of compounding in your savings, and once you realize that money just multiplies on its own, this personal experience will be far more effective than any financial literacy class that you attend. Inevitably, the savings grow, people save more, and it becomes a virtuous cycle.