Spend less this festive season

With investments down, adding more debt would only hurt your interests.

Sumeet Vaid, a Mumbai-based certified financial planner, is finding it hard to convince clients not to stop their systematic investment plans to make their annual festival expenses. He seems to be fighting a losing battle with many. “With the market swinging like a pendulum, most are unconvinced,” he regrets.

Another senior banker says many cash-short people are already applying for personal loans or seeking more credit limits to enhance their spending ability. Reason: Festive spending is a ritual. Even in bad times, many feel they have to make it to convince family, friends and neighbours of their wellbeing. Worse, many have to deliver on those promises – the latest phone or laptop or toy – to their children.

But the past eight months haven’t increased your wealth in the market. And, if you are in debt, there will be a loss of interest. Your money has lost nearly 19 per cent since the beginning of this year. And, no one can say for sure if the markets have bottomed. If some invested in debt (fetching up to and over nine per cent yearly) in the past few months, they cannot withdraw the money, as most instruments come with a lock-in period. Add to that the high interest cost that one has to compulsorily service. All this has caught many individuals off guard.

Yes, there are those tempting offers by various manufacturers – zero interest, pay in instalments, buy three and get one free, etc. Opt for this only if you can repay in time. Or, if you can barter your discretionary expenses for festive spending. If you cannot, you could do with cutting your shopping bills this year.

The ‘spending’ investor: Many people think liquidating some of their investments would help. Importantly, they feel they can do so because they will make up for it in the coming months. But in these market conditions, exiting at a loss makes little sense. Yes, if you made an investment in October 2009, you are sitting on a good corpus. Liquidate some of it. But don’t overdo because the recent investments are in losses. “Investments are made for a reason and liquidating it will ruin future planning,” says Vaid. Investments can come in handy for other big expenses like your child's higher education or marriage.

The spendthrift: Yes, you may have paid off the last minimum instalment of your six cards. That does mean your borrowing eligibility or spending ability has just been enhanced. “We deterred some rotators who had huge outstanding (dues) from taking loans this time,” said the banker. He suggests these individuals first opt for clearing the dues in instalments, offered by many banks.

Instead, cut discretionary expenditure and use the surplus, if any, to purchase gifts. You can do without the Rs 2,000 weekend movie show. Use it to buy a nice gift for the child. Otherwise, it makes no sense to enhance debt just to make yourself happy about fulfilling your family's wishes. Personal loans are the second most expensive, charging an interest of 14 to 30 per cent, depending on the customer profile. Already down with debt: Certified financial planner Amar Pandit says many who spend 40-50 per cent of their income towards debt typically think they can borrow a little more and spend for the festivals. He advises against it, as you never know when you over-leverage yourself. It will take only a personal loan and a few credit card bills to push you into a debt trap.

Compulsive spenders, who spend first and save later, should be careful because you may not have any cash on you when you need it the most.

Pandit says these are quick fixes if individuals do not mend their ways around spending habits. “It is like losing weight. Initially, you try and lose five kilos and then get back to your old ways,” he says. So, build a corpus before you indulge.