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Before you spend, ask if the purchase will jeopardise your wealth and income

Posted by: Uma Shashikant on Jan 20, 2020 06.30 AM IST

There was an argument recently over a handbag. A friend wanted a luxury brand and paid a bomb for it. The other argued that such expenses were nothing but vanity. The former returned the compliment calling the other stingy. Who was right?

Spending appeals on so many levels. We feel a sense of power when we can pick from among many choices; we love the approval of fellow shoppers and the attendant; we like the ownership of stuff we believe puts us in a league we aspire to be in; we feel triumphant about getting a good deal; and we spend because wants trump needs, mostly.

It is nice to know one should buy only what one needs, and not be misled by advertising and promotion. But the willpower, discipline and long-term orientation required to keep spending in check are tough to instill and practice. All of us are guilty of impulsive spending at some time or the other, even if we believe we are not vain and are quite careful about money in general.

Where does one draw the line? How much is too much? Why does the spend of one look like a waste to another? A good way to answer this question is to ask whether the spend is big enough to pinch us severely. When I was a student, I would walk to college instead of taking the bus. The fare was 25 paise one way and the distance about 3 km. But my monthly allowance was only Rs 10. If I spent 50p every day for the 20 working days of the month, as my mother had intended, I would have nothing left for spending with friends! In absolute terms, 25p was a small amount. But as a percentage of my then income, it was large enough to pinch.

As income goes up, how much of a spend will pinch is the question to honestly answer. A quick mental math that computes what percentage of one’s income and wealth is being spent on something will show whether it will matter or not. One man can spend Rs 10 crore on his daughter’s wedding, and that does not even make a dent on his wealth; Another takes a loan for a ceremony in his home and spends the rest of his life in deep debt. We like to stricture the former; but the latter is the one who erred.

The question of affordability is answered when one asks how long it would be before the spend is replaced by fresh income. A film star who earns a large amount may not repeat her clothes ever; the scion of a wealthy business may indulge in a new car too often. If others ape them to feel rich, they must be sure that the dent on their income and wealth is also too small to matter.

Both conditions matter. If a household’s income is Rs 75,000 a month, and it spends Rs 5 lakh on annual holidays, it is hurting its own finances severely. The spend is too big because it would take more than half the annual pre-tax income to fund the extravagance; and such a large spend in one lumpsum would not be possible without dipping into accumulated wealth. Choices about what is frugality and what is extravagance are clear when one compares the spend with income and wealth.

The businessman and film star we mentioned may have a wealth level so high, that they won’t have to check prices before buying stuff. However, they may still make the choice to fly business class rather than charter a plane. At some level, some spending decisions hurt. We have to know that level.

My other friend who dismissed the handbag as vanity could afford to buy the bag too. Why did she not want to spend? Does that make her stingy? There is the interesting spending hierarchy to think about. Every expense can be at its basic minimum and move up higher and higher. My streetside vendor makes a special cutting chai for Rs 4 and the aroma of ginger and the freshness of the milk are hard to beat. After paying Rs 300 for a lukewarm contraption at a fancy outlet, I swore never to repeat the mistake.

Those who heard the chai story told me that being seen at that branded outlet that sold horrible tea was a lifestyle statement. You were proclaiming your status by buying that expensive chai. Being seen standing under the tree and sipping chai out of a glass was too infra dig for someone who is earning well. But I liked the cutting chai, I protested.

That hierarchy is available for every spending decision. A basic second-hand car or the fancy luxury car that just got introduced in the market; a simple one-room apartment that is adequate for our now tiny family, or the 6-bedroom penthouse; the simple lunch at Mani’s or the expensive menu at the Taj; the list can encompass all spends. From the basic to the expensive, we all have the choices.

We must look at that hierarchy and ask where we stand to make a decision. Which is the one that best fits our situation? Which is the one that won’t burn the wealth, smoke up the income, and put to jeopardy other long-term goals? Which is the level that satisfies our need? We may want the world, but what we can match is limited by our finances.

It is easy to stay high and look down at the lower choices with disdain. Yes, just like snobs do. But it is always powerful to know the slot and shoot a few notches lower. Like the choice of cutting chai, made by people like me and other tie-wearing gentlemen who don’t mind. The power comes from knowing that we can move up that hierarchy of choices easily, but we can also easily settle lower if we wish.

What about moving higher? That is what we know as lifestyle creep. By shooting above one’s league, one gets quite used to pitching the spend at a level the finances don’t support. It is tough to climb down afterward.

Between the extreme frugality of spending too little, and the careless extravagance of depleting our wealth, lies a golden mean that only we know for our money if we cared to see with honesty. That is why this kind of finance is personal.

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