Why one must not be dangerously efficient with their personal finances: Little bit of slacking can go a long way – The Economic Times

Clipped from: https://economictimes.indiatimes.com/wealth/plan/why-one-must-not-be-dangerously-efficient-with-their-personal-finances-little-bit-of-slacking-can-go-a-long-way/articleshow/82655745.cms

Synopsis–The pandemic has made us realise that for both businesses and individuals, it’s possible to be harmfully efficient. Despite the hardship and suffering, adversity is a great teacher. Surely for individuals, it will be one, who will perhaps spend less and only on necessary things.

The other day, one of my favourite bloggers, Shane Parrish, who writes the Farnam Street blog, wrote a post titled, Efficiency is the Enemy. The title sounds like heresy but the argument makes sense. Being efficient sounds great but means that you have no room for error and are always just this short of being stretched beyond limits. Early during the pandemic, when the resumption of significant businesses activity was still under a cloud, I wrote an editorial in Wealth Insight magazine which was ‘In Praise of Inefficiency’. That was mostly about businesses and the virus, but the principle certainly applies to many other things, including personal finance.

Parrish writes of a hypothetical visit to the outer office of a successful CEO where he observes that most of the CEO’s secretarial staff does nothing much of the time. This looks like inefficiency, but is it? The job of the CEO’s personal staff is to be available to work on whatever is needed without delay. Their job is not to stay busy but that the CEO stays as busy as needed. This means that they have to be free to take up anything that comes up without delay, which in turn means that much of the time, they must stay free. In other words, they must have slack capacity. Going by the naive idea of efficiency, this is extremely inefficient. In reality, it’s very efficient indeed.

Parrish bases his idea on Slack: Getting Past Burnout, Busywork, and the Myth of Total Efficiency, a book written by management expert Tom DeMarco some 20 years ago. Needless to say, the idea that slack is good hasn’t made much headway in corporate life. However, the pandemic actually points towards the idea that slack is good and efficiency is inefficient. I first noticed that the pandemic had exposed efficiency and productivity as weak spots of modern businesses and wrote about it in July last year.

I first realised this when a friend who knows the private healthcare business deeply pointed out as early as February that the top hospitals all had very little spare ICU capacity because that was inefficient from a business point of view. However, this is not just about healthcare.

“There are way too many people—especially young people—whose entire incomes are earmarked for just EMIs and basic expenses. There is no slack at all, no buffer, no emergency fund and no easy way of building one.”

— Dhirendra Kumar
The businesses that suffered the most are the ones that were operating on a razor’s edge of efficient use of resources. These were the ones that were getting by before the pandemic with what looked like precision. Their revenues, costs, debt and profits were tuned just so precisely for them to grow and make money. However, the lockdowns and the slowdown hit them very badly. A severe reduction of sales immediately made them deeply uneconomic. There were no reserves of any kind at all. A globally dependent just-in-time supply chain was efficient. Extra inventory was inefficient. These were unchallenged beliefs that turned out to be time bombs.

There’s an obvious equivalent in personal finance as well. There are way too many people—especially young people—whose entire incomes are earmarked for just EMIs and basic expenses. There is no slack at all, no buffer, no emergency fund and no easy way of building one. The slightest disruption of income, as has happened to some during the pandemic, has blown apart their personal financial situations. Again, I’m not blaming anyone here on an individual basis. Many people have no leeway to do anything better. However, even amongst those who do, many don’t.

Despite the hardship and the suffering, adversity is a great teacher. Surely, for individuals, it will be one. Perhaps people will spend less and only on the more necessary things. Or perhaps not, who knows. This hasn’t happened in those countries where the pandemic has died down and did not happen in India either during the brief off-season when covid had taken a back seat.

(The author is CEO, Value Research)

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