My neighbour’s son asked his dad a simple question, “Are we rich or poor?” The hassled dad told me that although they lived quite well, he still dithered over a weekly brunch at a five-star hotel. He could not help looking at the right-hand column of the menu card. The conflicting signals about their relative state of prosperity were being picked up by sensitive children. He was wondering how eating out has become a mandatory demand on his income and if he should give in or protest.
There was a time when austerity was a virtue. A household focused on the basic living expenses, usually drew up a budget to control the expenses, and postponed large purchases to festive times when the annual bonus was paid out and shops offered discounts. Switching jobs for higher salaries, joining bonuses, variable pay, and stock options were unheard of. Banks usually borrowed from retail markets and lent to businesses and personal loans and credit cards were unheard of. That era represented sticking to basic spending. In the last 20 years, discretionary spending is the new virtue.
Urban upper middle class households spend a growing share of disposable income on discretionary items such as entertainment, holidays, home décor and gifts. They meet the basic expenditure with ease and are left with spending power that drives the consumption of luxuries. The reckless tend to get into a debt burden, grossly over-estimating their future income and its ability to pay their debt. The conservative shun all kind of borrowings and make it a point to save before they spend. The majority is in the middle, trying to dither between spending and saving and thus evoking candid questions from the kids. My neighbour likes to be the cool dad who lets the kids indulge and pay the bill without looking, but is not so sure he could pull that off. The worry is that if spending becomes a habit and once the family gets used to it, what was discretionary becomes a mandatory expense that needs to be met to keep the happiness quotient up. To be reminded that this is the route American consumerism took before household savings dipped to one per cent and one crisis made many families bankrupt, is a frightening thought.
There are a few simple tools to deal with the dilemma of spending. The first one is to create mental budgets. If you earn Rs 2 lakh a month, two brunches for a small family at a five-star restaurants could be about four per cent of that income. Keep a cap of 20 per cent on all such expenses in a month and mentally reallocate without making it explicitly known. Manage activities of the family so that every trip out need not mean a high cost. If one weekend was a movie at a multiplex and dinner, the other could be a drive to outskirts with a picnic hamper. If every expense is mentally linked to the income as a percentage, it helps keep calm and also exercise implicit control.
The second is to allow kids to participate in financial decisions in a limited manner, so they understand opportunity costs. For example, if a budget is allocated to expenses from going out on weekends in a month, this can be announced so the choices are made within this number by everyone in the family. This enhances participation and improves financial skills of allocating a limited resource among competing choices.
The third is to keep aside a small percentage of income on an annual basis for large spends. This can be unexpected credit card spends that draw into future income, or gifts, renovations, holidays that tend to be larger than a single month’s income. A mental map of say one-month’s salary to be spent on holidays helps.
We may not make budgets to manage the basic spends like our parents did, but surely need to make it for the life style spends, preparing for the eventuality that some of these will become mandatory as we get used to it.
The writer is managing director, Centre for Investment Education and Learning
