It was a sunny Sunday morning and I called Rohan, my good childhood friend and also a financial planning client, for a game of tennis. During the game, Rohan was looking somewhat pensive. Having known him for all these years, I knew something was wrong.
He confided in me that his cash flow situation was not good. His expenses had shot the roof, in the last few months. With festive season round the corner, he was concerned about his promise, to buy some expensive items, to his family. He reached out to me, to bail him out of this situation, with my advice.
The good news is that Rohan is not alone. With the advent of a booming credit economy and online websites offering zillions of deals and discounts, it is becoming difficult for families to resist the temptation to splurge more than they can. This, of course, proves to be costly in the long run! Here are four tips on how to spend wisely and save smartly, during this festive season.
Set the right expectations within the family
Family is typically the centre of our life. We love, we care. But we also tend to sometimes go berserk while expressing our love, by indulging them in expensive gifts. Let’s be more financially disciplined and understand that while we do love our family, purchasing expensive gifts is not the only way of expressing one’s love. Ensuring proper fiscal prudence and things like taking the right insurance, making proper investments etc. play a much bigger role in deciding a family’s well being.
Stop spending recklessly and set the right expectations within the family. Make it a practise, to sit together before the festive season and mutually discuss the financial situation. Then arrive at a consensus on the allocation towards festival bonus. A collective decision plays a big role in enhancing ties between family members. Also, often it is here that the compatibility between the spouses comes to test.
Set a budget and stick to it
The best way to take control of festival spending and saving is to decide on a budget, an upper limit. Ideally, a festive spending should not let the couple stop any systematic investment they’ve been making for their financial goals and the spending should be out of the bonus received from the employer. So, if a person receives for example, Rs. 1 lakh Diwali bonus from the employer, then rather than deciding how to allocate after it hits the bank account, the couple should pro-actively discuss and plan it well before. So, a good strategy can be to use Rs. 50,000 to pre-pay the EMI, Rs. 25,000 to beef up the emergency fund and the remaining Rs. 25,000 towards festival purchases. Now fixing the upper limit at Rs. 25,000 in this case automatically fixes the family’s expectations and is a more systematic way of capital allocation.
Go for things you ‘need’ rather than things you ‘want’
As Warren Buffet, the legendary value investor, has so wonderfully said: “If you spend on things you do not need today, you’ll have to sell the things you need later”. Remember this golden rule when you make your vital spending decisions. So, instead of buying a high-end car with a loan, if you purchase a mid-segment car with full cash down, then simple maths will tell you the savings in interest cost and even fund another small car! So, why waste money. The important question for a couple to ask themselves is, ‘Do we really need this?’ Clarity on this front is half the battle won!
Do not succumb to clever marketing tactics of sellers
The universal problem of shoppers is that they often go shopping to buy with something in mind and then walk out of the mall having shopped everything, but what they had intended to.
This is due to lack of self-awareness. As Robert B. Cialdini shares so well in his book“Influence: The Psychology of Persuasion”, marketers employ all kinds of tactics to get your ‘yes’, even without your knowledge. From the discounts to the offers to the easy EMI schemes to even the overall ambience when you enter the mall, everything is carefully designed. They are just waiting for the bait!
This is where you have to set your financial goals and spending limits very carefully in your mind. Else, be ready for a long journey of loans and interests to pay.
Shop only for items which are within your budget, pay via cash/debit card (preferably, do not carry your credit card, at all). Say no to loans and offers, and browse around before finalising your purchase. Don’t fall into the trap of zero per cent interest schemes; ask for the fine print of a deal/offer and check the processing fees in case of loan transactions.
Also, do not forget to ‘ask’ for a better deal. More often than not, you’ll get it.
The festive season brings with it a lot of joy, celebration and good cheer. It is in these times that a person may lose his or her focus on financial planning. Do not make costly financial mistakes. Spend, but within limits, with the right awareness and after taking a holistic view of your finances.
As far as my interaction with Rohan was concerned, our tennis game ended up in a personal finance class. It left him feeling confident about his festive financial planning, without compromising the financial well-being of his family.
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