Shruti and Ashish are making the common error of using their long-term savings for their short-term expenses. By doing this, they may jeopardise their long-term important goals, such as retirement and the education of their children. When they pull out money early from these savings, they lose out on the benefit of compounding, which would become a sizeable component of their final corpus over time. For the benefit of compounding to work, the funds have to remain invested for a long period. When they withdraw funds for their short-term expenses they are denying this advantage to their investment. If their intention is to make up when their income gets better, the amount they have to contribute will be much higher than what they withdrew. Their commitments and situation at that time may not allow the larger contribution. Unless the Shahs are sure that they will have a large disposable income or a sizeable inheritance to counterbalance later, it is best that they do not touch their long-term savings.
If the Shahs are not able to find funds for their short-term requirements, it indicates a situation of poor budgeting or that they are aspiring to a lifestyle beyond their means. A financial plan will help them see their short and long-term goals realistically in the light of their ability to save. It will enable them to prioritise their goals while allocating their savings based on urgency. At the same time it will help them see the implications of allocating more of their current savings for their short-term discretionary expenses on their important long-term goals and financial situation. It will probably encourage them to change their spending and saving habits so that their financial security is not at risk.
Content on this page is courtesy Centre for Investment Education and Learning (CIEL).
Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.