It is quite normal in the family to discuss about budget and expenses; Husbands focus on reducing grocery bills whereas wife’s obsession is with expensive wasteful expenditure on restaurants and husband’s alcohol. Health-conscious wife advises her husband to join the Gym after seeing her husband’s growing belly.   The family’s budget had been blown by a princely sum of ₹5,000, 10% of their monthly routine expenses. But they have conveniently overlooked some items which have overshoot their expenses. Rent has increased by 30%, Credit card has nearly doubled their average monthly spend. The Singapore vacation overshot the budget by 40%. Let’s not forget the XUV. It was beyond the budget with some fancy avoidable accessories. While the big spends are making big difference in the budget, no amount of belt-tightening around the small stuffs are going to help much compared to those big outflows. Food, for example, is only 10-15% of an average monthly spend, transportation expenses around 5%, utilities at 8%. The big spend items are vacations and entertainment which are more than 20%, Rent or Home loan EMIs at 30% and Endowment Insurance Premiums at nearly 20%. Now a days the Discretionary expenses are increasing drastically; Gadget up gradation, Fitness devices, Society charges, Salon and Spa expenses and Pets expenses. But families constantly split hair over optimizing the 5% or the 8% instead of focusing on the biggies. Such behaviour impact wealth creation. Families obsess about how equity investments dropped by 2% between last month and this month or how dividends from some stock were lower or higher this year. Buying an endowment/ULIP insurance but ignoring online Term insurance which is much cheaper for protection; negotiating the price of onions but ignoring an under performing investment portfolio; holding on to an uneconomical property in the hope of a price upswing (thereby ignoring the opportunity cost of selling and reinvesting in better asset classes); maintaining excessive cash in savings accounts instead of liquid funds; investing blindly without the guidance of a qualified adviser. The downswing in the equity markets and the liquidity crisis in the debt markets has made investors uncomfortable. Should they pull out and invest in fixed deposits? Or in something they can touch and feel, like gold? The point here is that what falls also climbs up after a while, assuming the investment’s fundamental attributes are still sound. Gains or losses in the next month, six months or even a year are notional. But if you realize a loss by selling, you have booked the loss for good. Think five years ahead. Will this matter to you then as much as it matters today? What if the markets moved up 12% after you redeemed, or the default papers in a Bond fund gets upgraded to a higher rating? Would that missed opportunity not stress you more? If the worst is behind us, there is only an upside to look forward to. People should focus on the principle of ABC analysis (Focus on 20% of the items which constitute 80% of the expenses) i.e. buying a bigger house, high EMI, a luxury car. It is much better to create a structured financial plan that helps you focus on things that matter, be it with regards to expense management or wealth creation. You may well be able to spend on what really matters to you even in vacations or a house or a car. You can stop worrying about trivial expenses and instead enjoy the treasurable experiences of your life. Source: Mint Money: Personal Finance 31^st October 2019