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| Capitalstars Investment Advisor |
Hierarchy is there for every spending decision. A basic second-hand car or the luxury model; a simple one-room apartment or the 6-bedroom penthouse; the lunch at Mani’s or the menu at the Taj; the list can encompass all spending.
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 spending 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 spend will pinch is the question to honestly answer. 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 lump sum 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.
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.